Retirement is rapidly ap-proaching for the baby boomers that make up the bulk of most advisors’ client base, and with their changing lifestyle will come a switch from asset accumulation to income creation.

While accumulation may not be easy, the concept is relatively straightforward. Put money away on a regular basis, invest in a diversified portfolio, and be prepared to weather some volatility along the way while amassing the savings required to produce an income stream in retirement.

But once your client actually crosses the threshold into retirement and the objectives change to producing an income while preserving wealth for an indefinite period of time, the challenges become increasingly complex.

“The next great market will be the structuring of retirement income, and that will be very different from the accumulation phase where most advisors have been focusing their practices,” says Jordy Chilcott, vice president of sales and retail markets for Montreal-based Standard Life Assurance Co. of Canada. “Even the basic math is different. When you’re accumulating you can invest money over time, and it’s the average annual rate of return that counts, not the individual negative or positives on an annual basis. But in the disbursement phase, negative returns in the early years, at the same time that money is being withdrawn, can result in irreparable damage.”

While the retirement of baby boomers has already begun, the trend is expected to accelerate leading up to 2011, when the oldest baby boomers will reach the commonly accepted retirement age of 65. Statistics Canada projects that by 2041 the number of people age 65 and over will more than double to about 10 million Canadians, and these seniors will make up about one-quarter of the population. Already, Canadian households headed by someone 65 years of age or older hold almost $1 trillion in assets and account for 40% of the wealth market, and this share of financial assets will only increase in the coming years.

Increasing longevity is an important issue affecting the management of assets for the next generation of retirees. Because no one knows how long they may live, it’s difficult to know if they will require 10 years of retirement income — or 40. According to Statistics Canada mortality projections, there is almost a 90% probability that at least one member of a couple age 65 today will live to the age of 80, and more than a 40% chance that one of them will live to 90. The problem is that if you and your clients plan for their financial assets to last until age 90 and they live to 94, the plan will have failed. Because each person’s final date with destiny is an unknown, many advisors are assuming an age of death of 100. Inflation, portfolio returns and health costs are some of the wild cards clients must deal with in retirement.

“Retirement could be a lot longer and more expensive than many people originally thought,” says Patricia Lovett-Reid, senior vice president at TD Waterhouse Canada Inc. “There’s so much emphasis on save, save, save, but very little on how to spend during this phase, which can easily amount to one-third of our life.”

There are a number of areas where advisors can be helpful to their clients in the five or so years leading up to retirement and at various stages through the increasingly lengthy period of retirement living. First of all, it’s important for clients to do a serious evaluation of their desired retirement lifestyle and its costs, and not to abandon income-earning opportunities such as full-time work until a sufficiently large nest egg is in place.

“For many people, age 50 is when they hear the wake-up call,” says Dan Richards, president of Toronto-based mutual fund research firm Strategic Imperatives Ltd. , whose research on investors with assets of $250,000 or more shows they want to retire by 60. “Retirement is no longer in the remote, misty future, it’s more immediate. Folks need to do the math, particularly if they don’t have a company pension.”

While 70% of pre-retirement income is commonly used as a ballpark estimate of what people will need during retirement, the amount varies with each individual. Some people have paid off their mortgage, put their kids through university and live a relatively low-cost lifestyle, but others want to renovate the kitchen, move to a fancy condo, travel, play golf, go out to restaurants and pursue hobbies they didn’t have the time for while working. It’s possible they may actually spend more while they kick up their heels in the initial years of retirement freedom.

@page_break@“Some people think they will work part-time in retirement and do interesting, flexible, well-paid work on their own terms to supplement their investment income, but the minority will succeed at that,” cautions Richards. “There will be some demand for consultants and freelancers, but the supply of candidates will be higher.”

Ted Rechtshaffen, president of Toronto-based TriDelta Financial Partners, says that about five years before anticipated retirement is good time to sit down with clients and calculate all sources of retirement income, including government and corporate pensions, RRSPs and non-registered investments. People may discover they will have more — or less — than enough to meet the costs of their desired lifestyle, and at this point they still have time to adjust their plans accordingly.

Rechtshaffen says if clients don’t have enough savings, they might want to:

> work to age 63 instead of retiring at 60 as hoped;

> downsize to a $55,000 a year retirement lifestyle from $65,000;

> cut back on spending now and save more; or,

> replace the large family home with a less expensive one;

> change their investment mix to include more growth securities such as equities; or

> borrow against a paid-off house and invest in financial securities while writing off the interest costs on the loan.

For people with a defined benefit corporate pension, Rechtshaffen says, working a few more years can make a huge difference to annual pension income, which frequently is based on the years of contribution as well as average salary in the final years of employment.

“Prior to retirement, decisions can be made by clients about working longer or changing their lifestyle to save more,” Rechtshaffen says. “There’s a big difference between needs and wants, and sometimes eliminating a couple of the ‘wants’ can improve financial picture.”

Peter Andreanna, a certified financial planner at Continuum 11 in Mississauga, Ont., says eliminating debt can go a long way to shoring up financial security. He says he is disturbed by a growing number of people heading into retirement with big mortgages and other debt.

“Retirement is a scary time to be carrying debt, but more people are doing it,” Andreanna says. “Big borrowers are vulnerable to rising interest rates and higher payments, and getting out of debt can make a huge difference to cash flow.”

In the disbursement phase of life, retirees who can no longer earn money through work are vulnerable to loss of value in their financial assets or a reduction in the interest and dividend income they produce. The further clients venture along the road into retirement, the more unrealistic it is to expect to find paid work to supplement retirement savings, and the higher the risks of health problems that may warrant expensive private medical care or even a long-term health care facility.

The unpredictability of investment returns generated by non-guaranteed assets is one of the biggest risks retirees must contend with, particularly at a time when the number of years they may need to live off their savings is increasing as life expectancies expand.

With interest rates continuing at their current low levels, most clients will have to venture beyond traditional fixed income investments such as term deposits and bonds to meet their income needs. They will require an equity component in a balanced portfolio, exposing them to fluctuations in value.

If the portfolio is fluctuating in downward direction at the same time that money is being withdrawn for living expenses, the damage may be more than clients can tolerate if they want their money to last the rest of their lives.

Many advisors are responding to investment risk by relying on a diversified basket of income products, with varying degrees of security. For example, segregated funds, principal protected notes and equity-linked guaranteed investment certificates offer exposure to the upside of equity markets, combined with the security of a full or partial guarantee of principal if the investment is held to maturity.

Typically, the guarantees offered by these products come with a cost that reduces the returns to less than a client would get from the same equity exposure without the asset protection.

“We are already seeing some innovation in the development of structured products and guaranteed solutions, and we will see a lot more for people who don’t necessarily want to shoot the lights out in terms of returns, but want to control their downside exposure,” Richards says.

Many advisors are recommending that some clients, particularly those lacking a defined benefit pension, purchase an income annuity that will guarantee enough to cover their bare-bones living costs for life — whether the person dies next year or lives for another 50 years. With an annuity, an insurance product purchased with a lump sum that produces a tax-efficient income based on a partial return of capital, the longevity risk of any one individual is passed on to the insurance company. The assets used to purchase a lifetime annuity are not usually available for heirs.

“People need assurance they won’t run out of money when it’s too late to do anything about it, and an annuity can be a good idea for part of the desired income stream,” Andreanna says.

Chilcott says insurance products can also be useful for critical and long-term care, and prevent clients from being sideswiped by unexpectedly large health expenses in the later stages of life. He points out that retirement is not a “flat, unchanging surface” but a time when life-changing events continue to happen, and people need to plan ahead for change as well as readjust plans along the way. The average senior citizen spends three to six years in poor health at the end of his or her life, according to Statistics Canada.

“People need to plan specifically for changes in health during the course of retirement,” says Chilcott. “They may face disability, becoming a caregiver to a spouse or the death of a spouse. The availability of financial assets or insurance to deal with these problems is a great determinant of quality of life in the later years.”

Toronto-based Manulife Financial Corp. has pioneered a product category new to Canada called a Guaranteed Minimum Withdrawal Benefit. For a minimum investment of $50,000, the Manulife IncomePlus insurance product guarantees a predictable income stream of 5% a year for 20 years. The income is guaranteed no matter how the underlying investments perform. The investor also has the opportunity to lock in any growth in assets along the way, and to use this growth for a higher income or a longer payout period. Unlike an annuity, the product allows assets remaining at death to be passed on to heirs.

“Canadians are going to need some products that promise income for the rest of their lives,” says Moshe Milevsky, a professor of finance at Toronto’s York University. “After retirement, they need to reduce risk with product allocation, not just asset allocation.”

Milevsky says guaranteed income products such as Manulife’s protect investors from “sequency risk” or the potential to suffer negative returns in their investment portfolio in the early years of retirement — a period he calls the “retirement risk zone.” Milevski’s research shows that once withdrawals are being made, just a year or two of negative returns at the beginning of retirement can mean an investor runs out of money much sooner than another person who achieves the same average annual return in their portfolio over the long-term, but enjoys positive gains in the first couple of years that vault assets ahead.

“Investors can be dramatically affected by what stop they get on the retirement merry-go-round, and when they experience a period of poor performance in their investment portfolios,” he says.

Other strategies to protect against portfolio erosion involve allocating sufficient retirement assets to provide three years of income into laddered GICs or money market funds. If equity markets then do poorly, the investor doesn’t have to cash out eroded equity assets for income, but can dip into what Chilcott calls the “cash wedge.” The cash can be replaced every year if the portfolio makes gains, but if it doesn’t, the investor has a cushion to ride out bear markets until it’s a more opportune time to raise cash. IE