Matching products to needs

Burns says retirement brings two kinds of risk that aren’t as time-sensitive in the accumulation stage. The first is financial, which includes inflation, low interest rates, volatile markets and the unknown future of pensions and taxes. The other is lifestyle risk, which includes the loss of a partner, the risk of outliving assets, the importance of liquidity and – for some – leaving a personal footprint through a financial legacy.

Burns says the tactics for a retiree need to be reviewed every three years. “People can see the end of a three-year cycle, but can’t [visualize] a 25-year plan,” he says. “[Using three years] gives investors the confidence to make decisions, whether it’s paying down debt, travelling or getting their life in order.”

Longevity risk can be partially managed through an annuity because it provides a monthly income regardless of how long the client lives. Tax-efficient products such as dividend-producing income and taking advantage of income-splitting also are high on Burns’ list.

There is some disagreement among advisors regarding whether government and/or company pensions will be around for everyone. But there are a number of other products out there that can provide an ongoing income stream, including systematic withdrawal plans (SWPs) from mutual funds, which generally are available for non-registered or RRIF plans. There also are guaranteed investment certificates (GICs), which pay out at specific dates.

An added touch for those clients investing in mutual funds is T-series funds, which return part of the capital, resulting in lower tax exposure. Toronto-based Mackenzie Financial Corp., for example, offers a T8 option, which pays out 8% of the fair market value of the client’s units in the form of a distribution, says Frank DiPietro, director of tax and estate planning at Mackenzie.

“And now we’ve been able to customize it,” adds DiPietro. “Investors can choose an investment of, say, $120,000; and with a T8 option, that works out to be about $800 a month in tax-deferred income. If the investor needs only $500 of that on a monthly basis, it can be customized so he receives $500 and reinvests the additional $300 back into the investment.”

Tax efficiency is especially important to retirees who are collecting old-age security (OAS) but earn enough money to have some of that OAS clawed back. “Being able to deliver income to those clients,” says DiPietro, “without actually increasing their taxable income goes a long way in helping them save tax and protect some of the other secure benefits that clients expect to achieve, especially from the government.

Jason Round, head, financial planning support, RBC Financial Planning, a division of Royal Bank of Canada, believes advisors and their retired clients should be talking every year about what the retirement plan has achieved to date and what the retiree wants to achieve in the next year or two. This will shape whether and how the current plan should be revised.

“Most people, unless they’re extraordinarily wealthy, can’t afford to go all conservative on Day 1 of retirement,” Round says. “It’s not a phase [in which] you put everything in conservative investments and expect that will last for 10 to 15 years. You do need to have some diversification.”

However, ongoing living needs do require a conservative approach because they have to cover the must-haves of everyday living, Round says. This can be accomplished by using a combination of annuities, SWPs and T-series mutual funds.

Lifestyle needs are in a one- to three-year planning category, to ensure the maturity of the investment is closely matched to the timing of the events the client wants the money for, such as a trip or a new car. Products aligned with this strategy include market-linked GICs, in which the principal is protected but exposure to market growth over the period of the GIC is included. Other choices, says Round, include short-term bond and income funds that have some certainty of principal and more upside potential, as well as regular GICs.

Round notes that if the money isn’t needed for five to 10 years, retiree clients can invest in products with a greater opportunity for growth, such as a diversified mutual fund portfolio. Or these clients might take advantage of bond laddering, as well as a mixed blue-chip stock/bond portfolio that can generate some dividends and moderate investment returns.

When it comes to leaving a legacy, Round suggests a regular life insurance policy. Or you can set up a portfolio of growth-oriented stocks and bonds that act to self-insure.

Burns says guaranteed minimum withdrawal benefit (GMWB) products have fallen a bit out of favour because a number of insurance companies have suspended sales of their products due to ongoing low interest rates, while other insurers have reduced the payout percentages. (See story, page B12.)

As well, Burns says, some clients have been burned in the various financial bubbles of recent years: “I think the problem is you can always fall into this flavour of the month. There’s a whole lot of money that is ready to go into the market, but investors aren’t ready to invest in it yet.” IE

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