Whether your clients are part of the tidal wave of greying baby boomers or still far away from their golden years, many conventional beliefs that they may hold about retirement are simply myths.
“Many of these myths, which are essentially false perceptions, have actually been perpetrated by the investment industry itself,” suggests Francis D’Andrade, managing director of Aurora, Ont.-based consultancy Financial Outcomes and author of Am I Going To Be OK? Achieving Financial Comfort in Today’s World. “We live in a sales-driven society,” he adds, which he believes has cultivated these perceptions to satisfy specific marketing agendas on the premise of providing retirement solutions.
People have been led to believe that “one size fits all” by learning about investing and retirement through various media, subsequently aligning their beliefs to what they have heard, says Kevin Sullivan, chartered strategic wealth professional, vice president and portfolio manager with Montreal-based MacDougall MacDougall & MacTier Inc. in Toronto. The reality, he adds, is that “there’s no single measure of retirement security.”
Thus, it is imperative that you help your clients get realistic about what it will take to get them to where they want to be.
Here are the five most common myths:
> Start Late, Finish Rich
This, says Sullivan, is “one of the most dangerous myths out there.” It gives procrastinators the false sense of security that they could still achieve their retirement objectives by “playing catch-up” in their later years. Sullivan argues that successful investing for retirement comes down to two factors: time and rate of return — and the SLFR strategy suggests clients can control the time factor.
“You can benefit from the magic of compounding,” he adds, “by starting to invest earlier rather than waking up in a panic when you’re closer to retirement and find you still have a lot of ground to make up.”
Stephen Reichenfeld, vice president and private wealth counsellor with Fiduciary Trust Co. of Canada in Calgary, says clients must understand the “consistent application of fundamental investment strategies works well over time.” He contends it is difficult to ramp up retirement savings in later years, especially if you have cultivated “a certain behaviour” that is inclined to spending.
Brett Strano, a financial advisor with Edward Jones in Mississauga, Ont., adds that some clients prefer instant gratification vs deferred gratification; by the time they are ready to catch up, they are faced with other expenses.
> All You Need Is A Million Dollars
Many clients have become enamoured of the idea of socking away $1 million for retirement. In reality, this amount is simply out of reach for most people; yet, it may not be enough. Says D’Andrade: “We have to determine how much is needed to retire comfortably, based on expectations of lifestyle during retirement.”
Knowing how much would be enough must also take into account risks relating to inflation, longevity, interest rates, the markets and unanticipated events, suggests Reichenfeld, who adds, “It is not a function of how much you have but how much you want to spend.”
He advises setting a “realistic withdrawal rate that is sustainable for your clients.”
> Avoid Equities Markets
There is no doubt that it is necessary to take extra care in managing investment risks during retirement. But, says Strano, “People misunderstand the true risks of retirement — living longer, an increased cost of living, unanticipated catastrophic risks and the effects of rising inflation.”
So, he points out, investing in “risk-free investments and taking no risk at all means taking on additional risk.”
Thus, Sullivan contends that advocating the traditional bias toward fixed-income is a “disservice to investors.” Clients have to invest in equities, he says, to reduce the probability of outliving their money while prudently managing risk.
>You Spend Less During Retirement
In general, many clients do have lower expenses in retirement, D’Andrade says. However, many retirees are spending more on recreational pursuits and vacations, and could face increased health-care and long-term care costs.
As well, Strano says, “A lot of people do not think about the ‘what ifs’.” He argues that although clients might cut back on spending, their living expenses can rise. “What if they become disabled,” he asks, “and cannot look after themselves?”
> You Have To Retire
Clients look forward to retirement as a time when they no longer have to work. But that view has been changing. Retirement itself is becoming a myth. “[Retiring at] 55, which was once an aspiration,” says D’Andrade, “is now truly a myth.”
Rather, Reichenfeld says, clients can “consider changing the pace of what they do. Or choose to do what they love.” IE