Millions of Canadians will turn 65 in the next few years, and as this momentous demographic shift takes place, financial advisors may suddenly find their client rosters dominated by retirees with a brand new set of financial priorities.
Specifically, baby boomers are beginning to enter the “de-accumulation” phase of their lives, in which they’ll start dipping into the nest eggs they’ve gradually built up over the course of their working years. For the first time, these clients will see the size of their assets begin shrinking on a consistent basis, and they’ll likely need help navigating this new financial reality.
“The de-accumulation phase comes with a whole new set of variables that clients have never had to face before,” says Tina Di Vito, head of Toronto-based Bank of Montreal’s Retirement Institute and author of 52 Ways to Wreck your Retirement — And How to Rescue It. “There is an awful lot of advice that the advi-sor now can provide clients that is a little different from the kind of stuff that we’ve had conversations with them about in the past.”
As your clients retire, they’ll need less advice on increasing their wealth and saving for the future but more advice on generating income from their portfolios and ensuring their nest eggs last for the duration of their retirement. These clients are also likely to have questions pertaining to estate planning, intergenerational wealth transfer, insurance products and strategies for minimizing taxes in retirement.
“There’s a fundamental shift in the needs of a person pre-retirement and post-retirement,” says Kevin Strain, senior vice president, individual insurance and investments, for Toronto-based Sun Life Financial Inc. “I think there’s a huge need [for advice] here, and a huge opportunity for advisors.”
Most advisors are probably accustomed to working with some retirees; but the sheer volume of clients who will soon be retired could come as a shock. According to Statistics Canada, 4.4 million Canadians — 12.7% of the population — will turn 65 in the next 10 years, followed by another 5.4 million — 15.7% of the population — in the subsequent decade.
“There are so many Canadians that are going through this process all at once,” says Di Vito, “that it can actually have a significant impact on your book of business if you’re not prepared to have different kinds of conversations.”
Conversations with these new retirees will probably be different from the ones you’ve had with retirees in the past, in part because Canadians are living longer and also because the current investing environment has added a slew of new challenges to the retirement planning process.
Forty years ago, Canadians retiring at age 65 could expect to live 13 years in retirement, says Bob Gorman, vice president and chief portfolio strategist with Toronto-based TD Waterhouse Canada Inc. In contrast, a Canadian retiring at age 65 today can expect to live another 20 years, and many will live for another 30 years or more.
“The period in retirement that has to be funded from retirement savings has increased from 13 to 20 years, an increase of 54%,” says Gorman. “People will have to work longer, save more or earn more than they might have thought necessary on their investments.”
In addition, fewer Canadians are retiring with the luxury of a defined-benefit pension plan or employer-funded benefits in retirement, which means many clients will be on their own when it comes to funding retirement and the various heath-care costs associated with it.
“Chances are, if you work for a non-public-sector employer, you don’t have health benefits in retirement,” says Strain. “And Canadians are living longer, but that doesn’t mean they’re living healthier, necessarily.”
He urges advisors to talk to their clients about getting long-term care insurance, critical illness insurance and personal health insurance to cover any unanticipated costs that may arise in retirement.
All of this adds up to the need for more money in retirement. Unfortunately, the current investing environment isn’t helping retirees generate this extra income. Two decades ago, it was easy to earn solid returns on a low-risk portfolio; today, rock-bottom interest rates make it tricky for retirees to earn a decent rate of return on any sort of low-risk investment. As a result, retirees with conservative portfolios are likely to spend considerably more than they will earn on their investments.
“It’s harder to get that good, double-digit rate of return consistently,” says Di Vito. “What you’ve put away — your savings — to date becomes more important because you’re going to be dipping into your nest egg.”
To compensate for the dismal returns coming from guaranteed investment certificates and fixed- income, it may be appropriate for your clients to keep a considerable portion of their portfolios in equities in the early years of retirement — particularly because they’re investing for a longer time frame than did retirees in the past.
“With a 25- to 30-year time frame for retirement and interest rates that are very low,” says Di Vito, “you do have to still be strategic with your portfolio and continue to invest your money.”
Gorman recommends that new retirees have 50%-60% of their portfolios in equities, with an emphasis on dividend-paying stocks. With some dividend yields currently higher than government bond yields, these stocks can provide retirees with an attractive source of income. Research shows, Gorman adds, that dividend-issuing growth stocks tend to be less volatile than the broader stock market by about 30%.
“You have a superior stream of income that’s tax-advantaged, it grows over time and it should keep your capital intact with reasonable risk,” he says. “I’m not saying it’s without risk, but it’s pretty well controlled.”
Still, that amount of equities exposure won’t be appropriate for everyone. And it may be particularly unappealing to some clients right now, with market volatility hitting all-time highs recently.
Matt Wilhelm, an advisor with Waterloo, Ont.-based Sun Life Financial (Canada) Inc. in Kitchener, Ont., urges his clients to avoid taking on excess risk in retirement: “If you do increase your risk, you run further risk of depleting your capital further. And I don’t think that’s wise.”
Instead, when Wilhelm encounters clients who risk running out of money, he talks to them about the possibility of retiring a couple of years later than planned or working part-time in retirement.
In other cases, advisors simply may have to urge clients to rein in their spending. “[Advisors are] the ones in the best position,” says Di Vito, “to help clients understand how much they can be spending during those retirement years.”
You should begin having these kinds of conversations years before your clients retire to ensure they’re on track to meet their targets, retire when planned and, ideally, achieve their desired lifestyle in retirement.
“This process starts well before retirement,” says Wilhelm, “so that by the time they reach retirement, there are no surprises.” IE
In the February issue: products that could be helpful in the de-accumulation phase.