Planning without pain

“Gen-Xers don’t see life as a marathon; they see it as something to enjoy throughout,” says Gillian Stovel Rivers, senior wealth advisor and branch manager with Assante Financial Management Ltd. in Burlington, Ont. “They are aware of fleeting time and are trying to take advantage of everything they can.”

That means multiple goals, adds Richard Nickerson, senior financial advisor with Assante Wealth Management Ltd. in Halifax: “They don’t necessarily want a big house, but they may be interested in travel, private school for their children, living in a neighbourhood they like, a nice car, a sabbatical from work, and so on. There isn’t any right answer, so financial plans have to be tailored to specific values.”

Gen-Xers’ attitudes differ from those of other clients in other ways as well. Gen-Xers can be suspicious about financial advice. They have seen many media stories and advertisements that depict financial advisors in a bad light. Combating this suspicion isn’t easy because these clients often are focused on short-term returns while you are providing advice for the long term. Furthermore, Gen-Xers may find the great number of options are complicated.

Gen-Xers also can be suspicious about life and health insurance. They don’t want to pay for something for which they may get nothing back, and many don’t think they will experience an event that will trigger an insurance claim. This wasn’t an issue with most baby boomers, partly because they were brought up by parents who lived through the Great Depression and were very conscious of what could go wrong.

Given these attitudes, working with Gen-Xers can be difficult. But they can be persuaded to accept good advice. One of the keys is patience.

“Gen-Xers are hitting their stride in their career and have a lot else on their plate, between their kids and parents in their 70s or 80s,” Nickerson says. “[Gen-X clients] are dealing with so much that even if they come in to see you, it can still be hard to engage them in the process.”

One approach is to begin by telling potential Gen-X clients what you do. Explain how you design a financial plan to help clients achieve their goals and make sure they’re covered if something unexpected happens – and ask if that’s what the Gen-X client wants. You might get a response of “Sure,” but there still might be no real engagement.

A better approach may be asking what they want you, as their advisor, to do, suggests Adrian Mastracci, senior discretionary portfolio manager with Lycos Asset Management Inc. in Vancouver. Do they want help dealing with their finances over the long term or are they just interested in high investment returns? If the latter, they are looking for a stock market guru, not a financial advisor.

Once a Gen-X client becomes engaged in the planning process, you have to figure out how quickly that client is prepared to move. With all the demands on their time, they may be able to manage only one meeting a year.

A slower approach can work with these clients. For example, Shelley Johnston, senior wealth advisor with Investment Planning Counsel Inc. in Whitby, Ont., finds it best to tackle one issue at a time with some Gen-X clients. If clients don’t have wills or powers of attorney (POA), for example, that can be a good place to start. When clients understand that the government will step in and make decisions if clients die without a will or POA, they usually are motivated to have these documents drawn up. This is especially the case if clients have minor children, as they wouldn’t want the government involved in their kids’ guardianship.

In Year 2, you could look at financing children’s education or insurance needs.

Establishing retirement income goals may not come until Year 4 of the relationship. Some Gen-Xers think their 40s is too soon to think about retirement. As Nickerson says: “It’s hard to think 10 to 15 years into the future.”

Stovel Rivers also finds that retirement isn’t a focus for Gen-Xers. “Only 10% of the conversation tends to be about retirement,” she says. “The rest is about other goals.”

If clients aren’t ready to save for retirement, focusing on paying off their mortgage could be a good strategy. This isn’t necessarily an ideal approach from a purely financial perspective because clients can earn a return on investments that is higher than the interest rate they are paying on the mortgage. But it can work from a psychological perspective. The client is happy to pay off the mortgage and is likely to be more open to retirement saving when that’s done.

Nickerson thinks there are arguments for both sides. “If a client just focuses on their mortgage,” he says, “they may find [later] they don’t have enough time to save sufficiently for retirement.”

But, he adds, paying a mortgage off over a long period can expose the client to significant increases in individual payments if mortgage rates are high at any of the mortgage renewal dates.

As well, some Gen-Xers are debt-averse. Johnston has a 41-year-old client who doesn’t like debt. This person plans to pay off their mortgage by age 45, then redirect the payments into retirement savings.

Age 45 can be fine to begin seriously saving for retirement. “If you have 20 years to save for retirement, you can do very well,” Mastracci says. “Fifteen years isn’t bad, but 10 years is a little light.”

Many Gen-Xers aren’t fixated on retiring at a specific age. They are fine with doing some work after official retirement. Possibilities include consulting in their field of expertise and doing support jobs related to hobbies, says Greg Hillaby, executive financial consultant with Investors Group Securities Inc. in Calgary. For example, an avid golfer may work part-time as a starter at a golf course.

Gen-Xers don’t necessarily want a high income in retirement either. With all the treats they’ve had along the road, they may not, for example, want to spend lots of money on travel when retired.

Another key is making sure that near-term goals are respected. Gen-Xers won’t accept a financial plan that doesn’t include those interim rewards.

One strategy is using “buckets.” Mark Bertoli, investment advisor with Abbott Wealth Management Inc. in Kamloops, B.C., has a client who puts names on different accounts that correspond with his goals. This keeps all the goals front and centre and helps with any trade-offs that are needed. Bertoli calls this strategy “goal-based planning.” A client might have separate buckets for a family trip to Europe, a kitchen renovation and a sabbatical, for example.

Mastracci takes a similar approach. Once the first projections are done, he asks clients how much they need for other things, such as travel.

Stovel Rivers suggests that a client’s TFSA could be used as their “fun” account.

Most near-term goals that Gen-Xers have on their wish list are personal and enjoyable. But they also need to think of other things that may come up. An important one is the care of parents. What would the Gen-Xer do if one or both parents needed help? Are these clients aware of their parents’ wishes and their financial resources? Do the parents want to stay in the longtime family home? What help might they need? Is a bucket needed for this type of expense?

Here are some of the issues Gen-X clients need to look at:

RESPs

Children’s education is usually a priority with Gen-Xers, but you need to get down to the specifics, such as what kind of education they expect their children will want. “University or college is not for everyone,” Stovel Rivers points out. RESPs also can be used for trade schools, culinary training and other non-academic programs.

Another question: how much of that education does the client want to pay for? The RESP doesn’t have to fund the children’s entire education.

A related issue, says Jaime Power, consultant with Investors Group Financial Services Inc. in Guelph, Ont., is whether clients want to be able to help their children buy homes and, if so, how much those clients would be prepared to contribute. This can affect how much clients will put into an RESP.

Clients should contribute to RESPs at least once a year, so that as much as possible of the related government grant is obtained. The federal government provides a grant equal to 20% of what has been contributed each year, up to a maximum of $500.

When withdrawing RESP money, clients should use the government grant portion first. Then, if not all the money is used, the remaining money may be rolled into the RESP owner’s RRSP, if that person has sufficient contribution room, or the withdrawal can be taken out in cash. If taken in cash, all the money would be taxable in that tax year. You can provide valuable advice in this matter.

Retirement Savings

Gen-Xers have heard stories about older people having their old-age security benefits clawed back because their RRIF withdrawals pushed the retirees into a higher tax bracket. They have also heard about penalties incurred when TFSA withdrawals are replaced too quickly. This can lead to clients avoiding registered accounts – and missing out on the huge benefits of compounding earnings provided by these vehicles.

Most clients should have both an RRSP and a TFSA, but the amount put into each account should vary depending on the client’s current and projected tax situation. The rule of thumb is for clients to maximize RRSP contributions when their income is higher than when they will be withdrawing the money, and to maximize TFSA contributions if the client’s future tax rate is expected to be higher. You can provide annual guidance in this matter.

Another rule of thumb is to maximize workplace pension and other retirement-income contributions. Many companies provide matching contributions.

Insurance

Gen-Xers generally aren’t enthusiastic about insurance, viewing it as a sketchy industry that charges high premiums and seldom gives back. “We’ve done a poor job of demystifying insurance,” Johnston says, “so the old negative connotations of car and insurance salesmen still hold.”

One argument that may resonate is to ask clients what they think their biggest asset is, says Pieter Demeester, personal planning specialist with Investors Group Inc. in Toronto. “They will probably say it’s their house, but realize you’re right when you say it’s their ability to earn income. That is what insurance is designed to protect.”

Another approach, says Power, is to point out that one in two Canadians will get cancer during their lifetime. “If that [illness] reduces earning power or increases expenses, the money will probably come out of [the client’s] retirement savings if they don’t have disability or critical illness insurance.”

Workplace insurance policies should be maximized, but they do not usually provide sufficient coverage for most Gen-Xers. Furthermore, benefit packages can change.

Clients worried about not getting anything back for premiums may like the idea of return-of-premium policies, says Hillaby. These policies return the premiums to the policyholder if there is no claim before the policy expires. The premiums are higher than for regular policies.

If Gen-X clients don’t want to pay for permanent life insurance, they can begin with a term policy. Term policies usually can be converted to permanent whole life insurance at the end of the term insurance contract’s period.

If clients can’t afford the premiums for the ideal amount of coverage, they can start small and increase coverage later. “For example,” Demeester says, “if $700,000 in term insurance is needed, they can start with a $350,000 policy and increase coverage when income is higher.”

Clients also need to understand that banks’ mortgage insurance does not guarantee that the mortgage will be paid off if there’s a death. Banks don’t do the due diligence on policies until a claim is made and are reputed to reject about a third of claims. A good option is to get term insurance sufficient to pay off the mortgage.