The recession has led to a new frugal attitude among clients who are retired or on the verge of retiring, and that may be unjustified, experts say. That’s because the right financial plan should account for daily expenditures today and for portfolios bouncing back in the long run. So, retirees don’t need to plan on living with less cash.
That said, new retirees and those five years away from retirement are thinking about putting off the frequency of vacations or buying a new automobile, says Robert Dupuis, senior financial advisor with Winnipeg-based Investors Group Inc., who specializes in dealing with a senior clientele: “In general, they are definitely looking at their expenses and [asking themselves], ‘Do we really need to go on three trips this winter?’ They aren’t in a hurry to spend like they were before.”
Similarly, seniors who have been retired for a longer period of time are also becoming more cost-conscious of their day-to-day living expenses, says Emmanuel Hergott, divisional sales leader with Toron-to-based Bank of Montreal’s retail investments division.
In addition to postponing the purchase of big-ticket items, Hergott says, “They are cutting expenses on items such as groceries by switching to no-name brands.”
The job market has also made people on the cusp of retiring or those who have recently retired more aware of their spending habits, as they can’t rely on employment income once they retire, Hergott adds: “[Previous retirees] have been accustomed to a semi-transition, in which they may retire from their long-lasting employers but then they can have a full-time or part-time job in a second career.”
So, given this environment, Hergott says, it places an additional burden on your clients’ nest eggs, as clients don’t have additional income to support themselves until their portfolios bounce back.
As a result, some of those who are approaching retirement are putting it off for another six months to a few years, says Dupuis: “They are saying, ‘My equities are down, and if they don’t come back, I don’t want to run out of money in retirement’.”
The danger is that many such clients could be overreacting, especially if they have a financial plan already in place, says Lee Anne Davies, head of retirement strategies with Royal Bank of Canada in Toronto. That’s because a solid retirement financial plan should account for day-to-day living expenses while giving longer-term investments time to bounce back.
“The danger with the reaction to the downturn is that people are starting to live below their lifestyle,” Davies says. “It’s a frugality we don’t want to see.”
If a client’s financial plan has been organized in such a way that assets used to pay for day-to-day living expenses are separated from assets geared toward big-ticket items, such as vacations and automobiles, the client should be able to maintain his or her current lifestyle.
“When you know that you have that guaranteed money to cover those necessary expenses, that alone is peace of mind,” says Davies. “So, when markets go down and you are concerned your portfolio is losing money, it will take the emotion out [of it].”
Dupuis has another strategy: he recommends those who are approaching retirement to build up a rainy-day fund in a vehicle such as a tax-free savings account, as these clients may encounter larger than anticipated expenses in their first few years of retirement.
“Setting up a retirement plan,” Dupuis says, “is no longer focused solely on RRSPs.”
A recent RRSP poll, conducted by Ipsos-Reid Corp. on behalf of RBC and which surveyed 1,272 Canadians, revealed that 39% of new retirees said they encountered unexpected costs in their first year of retirement, with the majority saying those expenses occurred in the home-maintenance, health-care and vehicle-repair categories.
Without an emergency fund in place, your clients might feel forced to withdraw from their nest eggs to cover such costs before the markets have had time to recover, says Dupuis. Moreover, it’s dangerous to withdraw large chunks of money from an RRSP due to the tax implications.
Another investment vehicle your pre-retired clients might want to include in their plans — especially to pay for big-ticket items, suggests Hergott, are target-date funds.
These funds allow clients to set a date in the future for cashing out, while guaranteeing their principal as well as any gains earned in the meantime. “If I’m a client who expects to retire in 2022, and I don’t know when the next downturn will be,” says Hergott, “at least, I can get my savings back, plus growth in between now and then.”
@page_break@Overall, ensuring that your clients have enough, not only for the future but for today as well, is the key.
“The value of planning isn’t to make sure your money lasts, but to make sure you are enjoying your money,” Davies says. IE
Long-term planning can prevent short-term frugality
Retirees and those approaching retirement are cutting back on their expenses because of the recession; they don’t need to, experts say
- By: Olivia Glauberzon
- November 17, 2009 November 17, 2009
- 15:22