Lean living in retirement?

The survey of more than 31,000 individuals in 20 countries, including 2,000 Canadians, found that although almost 60% of Canadian survey participants have started to save for their retirement, only 40% were knowledgeable about how much money they will need in retirement; one-third had no idea at all.

“Although retirement is top of mind, there seems to be a disconnect in the planning and awareness phases,” says Karrie Van Belle, managing director with BlackRock Asset Management Canada Ltd. in Toronto. “Canadians have some work to do on their retirement IQ. As an industry, we can help support them through continuing education, but individuals also need to understand that they have an active role in their retirement future as well.”

The knowledge gap is highlighted by a significant discrepancy between the retirement income expectations of Canadians and their actual accumulation of savings. For example, Canadian survey participants stated that, on average, they expect an annual income of $46,900 for a 25-year retirement. However, their average nest egg amounts to only $70,700 – equivalent to about only 18 months of retirement.

“Canadians are living longer than ever [and that] means that they may need more money to get them through those extended retirement years,” notes Pat Chiefalo, managing director and head of Canadian product for BlackRock Canada’s iShares division in Toronto. “To help address this, [Canadians] should adjust their retirement savings approach and, rather than trying to build a nest egg, they should start thinking about how much annual income they will need.”

Regarding investing to achieve retirement goals, less than 10% of Canadian survey participants were very knowledgeable about their investment options, while almost 25% had no knowledge at all.

“Without question, Canadians lack the financial literacy necessary to ensure that they are well protected in their retirement,” cautions Greg Pollock, president and CEO of the Financial Advisors Association of Canada (a.k.a. Advocis). “It is difficult for people to know exactly how much they will need in retirement if they don’t have a financial advisor.”

The survey found that, as a whole, Canadians hold 60% of their investments in cash, 19% in equities, 7% in bonds, 3% in alternatives and the rest in other investments – allocations that are unsuitable for achieving their long-term goals. Yet, two-thirds of Canadian survey participants believe they have the right asset mix to fulfil their retirement needs.

“Canadians continue to hold high levels of cash in their portfolios because of the perceived comfort and security that cash brings. But, given historically low interest rates and the impact of inflation, holding that much cash in their portfolios simply won’t help them reach their long-term retirement investment goals,” says Van Belle.

“What we found is that Canadians tend to identify as savers (72%) rather than as investors,” she continues. “Whether it’s a discomfort they may have with investing – 51% think investing is like gambling – or the perception that they don’t have enough money to invest [67%], there are misconceptions that are holding Canadians back. To help get them off the sidelines, as an industry, we all have a role to play in helping individuals better understand the value in saving and investing.”

Ironically, Canadians, instead of relying upon advisors to assist with their long-term retirement goals, often approach financial advice as being transactional and short term in nature. Only 38% of Canadian survey participants currently work with an advisor, 21% have done so in the past, and 41% have never worked with an advisor.

More than one-third of Canadian survey participants indicated that they do not take financial planning seriously.

Part of the problem is that half of Canadians feel they don’t have enough money to go to an advisor, says Van Belle. This, in fact, presents a big opportunity for advisors to help Canadians plan for retirement, especially as 52% of Canadian survey participants said they have a limited interest in their investments, she adds.

However, one piece of good news is that Canadian survey participants who used advisors expressed a high degree of satisfaction with them. Independent investment counsellors received top marks for satisfaction (67%), but only 7% of Canadians use their services.

Advisors working at bank branches were most used (43%), but delivered the lowest level of satisfaction (46%). In comparison, full-service brokerage firms associated with a bank delivered higher levels of satisfaction (63%), although only 19% of Canadian survey participants use them.

According to Pollock, Canadians who use advisors not only experience a higher level of satisfaction, but also accumulate more wealth: “Research shows that individuals who work with a financial advisor accumulate significantly more wealth and are better prepared than those who do not. On average, advised households have three to four times the financial assets of non-advised households. There is still a percentage of the population that needs to be educated on the value of financial advice and long-term planning.”

Nevertheless, Pollock contends, even though maintaining access to financial advice is critical to the financial well-being of Canadians, they could end up having less access to an advisor because choice is based on how they pay for advice.

“The banning of commissions, which is being contemplated by the securities regulators, will remove choice and result in an advice gap. This type of change would ultimately prevent Canadians from making greater use of financial advisors,” Pollock suggests.

The BlackRock survey found that Canadians’ conservative attitude toward investing, accompanied by a wide range of fears, could be having an impact on long-term financial security. Two-thirds of Canadian survey participants said that the high cost of living is the biggest threat to their financial security, while 46% pointed to the state of the Canadian economy and 43% to the threat of rising taxes and inflation.

One important behavioural shift identified by the survey is the greater use of online resources, especially among younger Canadians and primarily for convenience.

Almost 60% of all Canadians use online sources to make long-term decisions about their savings and investments. However, younger survey participants (those aged 25 to 34) are even more likely to go online for advice (73% of this cohort).

Although bank websites were the most popular source (used by 43% of survey participants who are users of digital platforms and online information sources), 44% of this cohort said they desire some level of personalization in the process.

Says Van Belle: “As an industry, we should embrace all forms of advice, as they are providing Canadians with more options [in] advice models and financial education more broadly.”

However, Pollock cautions, digital platforms such as robo-advisors “typically only addresses wealth accumulation, while a professional financial advisor will take into consideration long-term goals and look at areas such as life insurance, critical illness and disability insurance, taxes and estate planning, and retirement planning.

“An online source can be useful and convenient,” he contends, “but the client still needs to have a basic understanding of the risks involved in investing.”

CANADIANS CONDUCTING FINANCIAL BUSINESS ONLINE

Activity / % of all Canadians / % of affluent Canadians*

Routine banking / 87 / 90

Reviewing investments / 49 / 71

Reviewing retirement savings / 44 / 68

Buying/selling investments / 26 / 41

Researching savings and investment products / 42 / 56

*with investible assets of at least $150,000

Source: Blackrock inc.Investment Executive Chart

USING ONLINE RESOURCES FOR FINANCIAL DECISIONS

Age (years) / %

25-34 / 73

35-44 / 68

45-54 / 58

55-64 / 51

65-74 / 43

All Canadians / 59

Source: blackrock inc.

Investment Executive Chart

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