In times such as these, many clients want to know whether they will be able to achieve their retirement goals, retiring when and how they want. Recently, controversy has arisen over the percentage of pre-retirement income that people will need in retirement.

On the one hand, you have the traditionalists, at 70%. On the other, you have actuary Malcolm Hamilton of Mercer LLC in Toronto arguing that most Canadians can get by with 50% of pre-retirement income, and that many clients are depriving themselves unduly to save more than needed. The implication is that the 70% figure is a scare tactic on the part of the financial services industry.

In the past year, Fidelity Investments Canada ULC has weighed in on this issue, suggesting that 70% may not be sufficient and that the real number is closer to 80% and, in some instances, even higher. Fidelity has done an in-depth research report on this, which those advisors who want to dig deeper might find useful. Among the support for its rationale is Statistics Canada data showing that post-retirement expenditures generally drop less quickly than income.

This debate reminds me of a line from American writer H.L. Mencken: “To every complex problem, there is a solution that is simple, straightforward — and wrong.”

That’s precisely the case here, because there is no one, universal number for all clients.

A couple of years ago, I conducted some research with affluent retirees on behalf of Manulife Financial Corp. in connection with the launch of its IncomePlus retirement income product. As part of that, we talked about what percentage of their pre-retirement income they were living on. The answers convinced me that the level of income required varies dramatically by individual retiree and by the stage of retirement he or she is in — which is great news for advisors.

If retirement planning came down to picking a simple 50%, 60%, 70% or 80% of preretirement income, it would be a relatively simple process — in which case, there would be no need for financial advisors. In fact, this is a complex subject on which almost all affluent Canadians need professional advice. Financial advisors are needed to do this, just as lawyers and accountants are necessary to craft a complex estate plan.

Complicating matters is the abundant anecdotal evidence on both sides of the argument. On the one hand, I’ve interviewed retirees who spend more than 100% of preretirement income. On the other, there’s William Hanley, a retired newspaperman who continues to write a column dealing with retirement issues for the National Post. He told me in an e-mail exchange that he and his wife winter in Hawaii, travel modestly and still are around the 50% level.

Bear in mind that the reality will be quite different for lower- and even middle-income Canadians, for whom Hamilton’s advice may be right. If a couple are each earning $40,000 when they retire (which puts their household income around the national median for individuals at retirement age), the Canada Pension Plan and old-age security give them combined retirement income of $30,000, almost tax-free. If their lifestyle is modest, they may not need large amounts of additional income. Of course, let one member of that couple pass away or go into a retirement or nursing home, and the situation changes dramatically.

One of the things I’ve concluded from talking to affluent retirees (the kind with whom most advisors work) is that there are generally three stages of retirement with quite different income needs: early retirement, mid-retirement and late retirement.

In early retirement, retirees tend to be healthy, more venturesome and more energetic. Here’s where the accumulated lust for travel often gets sated. And we’re not necessarily talking about inexpensive travel. Some of the retirees I interviewed who are spending more than 100% of their pre-retirement income are doing so in large measure as a result of exotic trips. One of the fastest-growing segments of the travel industry is high-end, luxury tours for seniors. They may also indulge in sometimes costly hobbies, spend more time eating out and entertaining, and spend winters in warmer climes. Some will continue to work part-time.

In mid-retirement, Canadians begin to run into health issues and scale back discretionary spending. They typically live independently, often in the same houses they occupied before retirement, although many need some assistance. Their interest in travel declines and often their cost of living drops. Toward the end of this period is when they stop driving, eliminating the need to own a car.

@page_break@In late retirement, Canadians need more substantial assistance. It’s now when they move to retirement and nursing homes or, in some instances, in with their children. And we’re not talking bare bones here, either. Very high-end retirement homes such as the Sunrise chain can cost well north of $5,000 monthly for a single room. In an extreme case, a woman I interviewed talked about using her mother’s savings (for which she had power of attorney) to pay $100,000 annually in round-the-clock nursing care. Given the low incidence of long-term care insurance, this cost is often funded in part or in whole by liquidating the real estate the retiree has accumulated.

Every client’s situation is different. Each retiree will spend different amounts in each of these three phases and each will spend different periods of time in each stage. Some less venturesome or less healthy retirees go right to mid-retirement, others spend 20 or more years in the early-retirement stage.

Here’s where an advisor is needed — to work with each client to determine the level of spending he or she anticipates at each level and how long that client expects to spend in each phase. While the 60%, 70% or 80% numbers can be helpful as rough guidelines, that’s all they are — very rough approximations. To get this right, you need to build a cash-flow needs projection on a line-by-line basis.

Some clients make it easy because they already keep track of expenses. But they’re in the minority. Most don’t have a clue where to begin. Again, here’s where financial advisors prove their worth.

For clients who don’t know where to start, you can build a model of spending needs from scratch. One helpful tool is the Statistics Canada report on average household expenditures by province, showing spending (including taxes) in 2005 ranging from a low of $53,000 in Newfoundland to a high of $75,000 in Alberta and Ontario. This needs to be adjusted for the cost of living in the individual client’s community; expenditures such as daycare, travel to work and CPP and employment insurance premiums need to be eliminated. But this survey does give you a useful frame of reference with which to begin a conversation with clients.

As you go through this process, you will run into another issue: the gap between what people want and what they need. The gap can relate to such expenditures as travel, the amount of financial assistance for children and grandchildren, and charities your clients support. One way to get at this is by having two columns for each spending category. On the left-hand side, there should be the amount they need to spend to live in an acceptable level of comfort. In the other, they should list how much they’d like to spend.

Going through this process and getting it right is neither fast nor easy. But it is the only way for clients to get a good grasp on what their “number” is. By taking the time to work through this with clients, advisors can add value and create peace of mind.

Advisors who have done this report a frequent payoff is referrals to friends and family members. And that’s not the end of the good news. The value you bring doesn’t stop when you develop the initial projection of cash-flow needs. Retirement planning is a dynamic process. Every year or two, you have the opportunity to sit down with clients and update their plans based on new information, revised objectives, their health and work prospects, and on how financial securities markets have been performing.

If markets have been especially kind or if clients reduce spending estimates, you might be able to move some spending from the “need to spend” to the “want to spend” column. Just be sure to leave a substantial buffer to protect against reversion to the mean on performance.

In a world in which many advisors struggle to demonstrate their value, helping clients get a firm handle on their spending needs in retirement is an opportunity to show your value and build a deeper bond with your clients. IE



Dan Richards is president of Toronto-based Strategic Imperatives Ltd. He can be reached at richards@getkeepclients.com. For other columns, see investmentexecutive.com and IE:TV.