Your clients already know they should be making regular RRSP deposits, investing long term and paying off debt. But they don’t always follow your advice to a tee.
They may procrastinate about starting a retirement savings plan or raid the RRSP funds for a non-essential purchase.
Here are two more ways clients sabotage their retirement plans — and ways you can steer them in the right direction.
> Failing to set goals
Many clients sabotage their retirement plans by failing to set clear personal financial goals, says Piercy.
To help clients understand what a clear personal financial goal looks like, Piercy offers this example: “I’d like to be financially independent within five years, with household income of $10,000 per month from our stock, real estate and business investments so I can spend my time gardening, looking after our grandchildren and volunteering with at-risk youth. I’d like to take two vacations annually with my husband in our motor home.”
That’s much better than a long list of unspecific, generic goals such as “retiring early,” “paying off the mortgage,” “getting a better return on investment” or “selling the business,” she says.
“Generic goals simply don’t resonate with the commitment required to see them through,” Piercy says, “whether it’s a retirement goal, a fitness goal, or any other lifestyle goal. The goal must be personal, specific and have an emotional meaning to the person setting it – and of course it must be in writing and be measurable in terms of accomplishment.”
> Carrying debt
An estimated 40% of Canadians currently retire with some debt. That’s a significant reversal from the past, when the conventional wisdom was that most or all debt should be eliminated before retirement.
Gillespie believes that debt elimination should still be a priority when planning for retirement. “[Advise clients to] repay credit card balances as a demand loan rather than a line of credit,” he says, “because that forces you to pay it off.”
It’s also better for clients to repay non-deductible debt, such as a mortgage, before investing in anything else, Gillespie adds.
He recommends this strategy for some clients: “Sell your portfolio to pay off your mortgage, if necessary, then borrow to invest, using the house as collateral. That makes the interest tax-deductible.”
Piercy, suggests advisors help their clients think about debt as a wealth-building tool rather than pushing them to eliminate it altogether.
“The key is to focus on income creation,” she says. “When clients can earn income from their assets, with proper monitoring and exit strategies in place, carrying debt isn’t an issue.”
IE