De­bunk­ing re­tire­ment myths

Help your clients avoid th­ese com­mon mis­con­cep­tions and mis­steps that can put their re­tire­ment at risk


al­though re­tire­ment ex­pec­ta­tions vary widely, most clients look for­ward to what they per­ceive as a com­fort­able re­tire­ment.

For some, plan­ning for re­tire­ment is all about hav­ing suf­fi­cient money to last them through their golden years. For oth­ers, re­tire­ment is about main­tain­ing an emo­tion­ally and phys­i­cally healthy life­style, which in­volves both fi­nan­cial plan­ning and life­style plan­ning.

Re­gard­less of your clients’ ex­pec­ta­tions, the path to a com­fort­able re­tire­ment is fraught with risks, chal­lenges, myths, mis­takes and mis­con­cep­tions. If you don’t help your clients ad­dress th­ese po­ten­tial stum­bling blocks early on, their re­tire­ment dreams could be badly com­pro­mised.

Your role as a fi­nan­cial ad­vi­sor is to help your clients un­der­stand the po­ten­tial risks they face, dis­pel the myths and be­liefs they may hold, and help them avoid mak­ing mis­takes that can de­rail their plans, in both the ac­cu­mu­la­tion and deac­cu­mu­la­tion phases of re­tire­ment plan­ning. myth: re­tire­ment be­gins at 65 “Re­tire­ment has be­come a more fluid con­cept and clients should be more flex­i­ble in choos­ing to re­tire at a cer­tain age,” says Matthew Wil­liams, se­nior vice pres­i­dent, in­sti­tu­tional and client ser­vices, with Franklin Tem­ple­ton In­vest­ments Corp. in Toronto.

For older gen­er­a­tions, age 65 was the “magic num­ber” for re­tire­ment. But with peo­ple liv­ing longer, a phased re­tire­ment — dur­ing which clients may en­gage in part-time work, work at a re­duced pace or pur­sue a “dream job” such as consulting af­ter age 65 — may be the an­swer. Al­though th­ese choices may not be ideal for your clients, mak­ing them aware of al­ter­na­tive re­tire­ment op­tions is im­por­tant.

“In the old days, peo­ple re­tired at 65 and prob­a­bly lived for only an­other 10 years or so,” says, Fran­cis D’An­drade, vice pres­i­dent, pri­vate client ser­vices, with Forstrong Global As­set Man­age­ment Inc. in Toronto. “[Now], you prob­a­bly have onethird of your life left af­ter age 65.”

In fact, the aver­age Cana­dian male lives for 22.6 years be­yond the tra­di­tional re­tire­ment age of 65; the aver­age Cana­dian fe­male lives for an­other 24.5 years.

In­creas­ing longevity is one of the pri­mary fi­nan­cial risks clients face in re­tire­ment. They run the risk of out­liv­ing their money or hav­ing to ad­just their planned re­tire­ment life­style to ac­com­mo­date a re­duced in­come, which may have to be stretched over a longer pe­riod.

myth: the govern­ment will pro­vide

Clients must be aware that they could face un­planned ex­penses, such as in­creas­ing health-care costs and the need for long-term or as­sisted care as they get older, Wil­liams says. There are likely to be other large ex­penses, such as home re­pairs, which could also place un­due stress on clients’ re­tire­ment funds.

Clients of­ten mis­tak­enly be­lieve that var­i­ous lev­els of govern­ment will cover all their health-care and as­so­ci­ated ex­penses.

Heather Hol­je­vac, se­nior wealth ad­vi­sor with TriDelta Fi­nan­cial Part­ners Inc. in Oakville, Ont., says long-term care in a rea­son­ably com­fort­able fa­cil­ity can cost as much as $60,000 a year, which can be a huge drain on a re­tire­ment port­fo­lio.

Some clients an­tic­i­pate lower ex­penses dur­ing re­tire­ment and, in some cases, they may be cor­rect. Some of the costs as­so­ci­ated with work­ing — such as cloth­ing, trans­porta­tion and meals — will drop. But in many cases, Wil­liams says, clients will spend more in re­tire­ment as ex­penses for travel, recre­ational ac­tiv­i­ties and home ren­o­va­tions may rise. Ei­ther way, clients must un­der­stand the im­por­tance of bud­get­ing.

When de­ter­min­ing how much money is enough for re­tire­ment, there is no “magic num­ber,” says Prem Ma­lik, in­vest­ment ad­vi­sor with Queens­bury Se­cu­ri­ties Inc. in Toronto. Each in­di­vid­ual is dif­fer­ent and a client’s de­sired re­tire­ment life­style will de­ter­mine his or her fi­nan­cial needs.

myth: “if i be­gin late, i can catch up”

The way clients in­vest for re­tire­ment is key to en­sur­ing that they have suf­fi­cient funds to last them a life­time.

“On their own, most clients don’t have a process in place,” D’An­drade says.

For ex­am­ple, some clients be­lieve they can be­gin sav­ing late, then play catch-up to save suf­fi­cient funds for re­tire­ment. Some set their sights on ac­cu­mu­lat­ing a cer­tain dol­lar amount — say, $1 mil­lion. Still oth­ers have ex­pec­ta­tions of un­re­al­is­ti­cally high re­turns from their in­vest­ments.

Make sure your younger clients un­der­stand that be­gin­ning early in in­vest­ing for re­tire­ment is crucial. Your clients’ in­vest­ments will ben­e­fit more from the power of com­pound­ing re­turns the ear­lier they start to in­vest.

mi s ta k e : in­vest­ing con­ser­va­tively

One of the big­gest mis­takes some clients make is to in­vest more con­ser­va­tively as they draw closer to re­tire­ment. They fear los­ing the money they have ac­cu­mu­lated and, con­se­quently, re­duce the risk in their port­fo­lios by re­duc­ing their ex­po­sure to eq­ui­ties and in­vest­ing in fixed-in­come prod­ucts in­stead.

You need to make clients aware of the haz­ards of in­vest­ing in low-risk, low-re­turn fixed-in­come as­sets, Hol­je­vac sug­gests. When you take into ac­count in­fla­tion and taxes in this low in­ter­est rate en­vi­ron­ment, clients who in­vest in low-yield­ing in­vest­ments could end up with a neg­a­tive real rate of re­turn. This strat­egy poses a big­ger risk than in­vest­ing in eq­ui­ties be­cause a client could run out of money sooner by in­vest­ing too con­ser­va­tively.

In­stead, your clients should have a bal­anced port­fo­lio that in­cludes ex­po­sure to eq­ui­ties for long-term growth — be­cause some clients may spend more years draw-

to o ing down on their re­tire­ment funds than they spend on ac­cu­mu­lat­ing those funds.

Al­though in­vest­ing in some eq­ui­ties is ad­vis­able at all stages of re­tire­ment, re­mind your clients that no one can pre­dict the be­hav­iour of the fi­nan­cial mar­kets and how it will af­fect their re­tire­ment port­fo­lio.

A de­cline in the mar­kets dur­ing the early years of re­tire­ment can lead to de­ple­tion of the as­sets avail­able for later re­tire­ment years. For ex­am­ple, if a client loses 10% of the value of a port­fo­lio worth $100,000 early in re­tire­ment, only $90,000 will be left to grow in the port­fo­lio to sup­port fu­ture re­tire­ment years.

Al­though clients can use a va­ri­ety of strate­gies to re­duce mar­ket risk, Ma­lik sug­gests us­ing a tiered in­vest­ment ap­proach: as­sets re­quired to meet fi­nan­cial needs for the first five years are in­vested in short-term se­cu­ri­ties; those to be cashed out in the next five years are in­vested in eq­ui­ties and fixed-in­come; and those not needed for 10 or more years are in­vested in eq­ui­ties.

When mak­ing in­vest­ment de­ci­sions, you must en­sure that your clients’ port­fo­lios are struc­tured to gen­er­ate suf­fi­cient in­come to meet their ex­penses at the var­i­ous stages of re­tire­ment. This is an im­por­tant risk that should be avoided, Wil­liams says.

myth:“my in­her­i­tance is my re­tire­ment plan”

A sig­nif­i­cant myth among pre-re­tirees is that the wealth trans­fer from par­ents and grand­par­ents will se­cure their re­tire­ment, Ma­lik says. Some clients are in for a rude awak­en­ing when they find that their par­ents plan to spend as much as they can while they’re alive.

In fact, the in­ter­gen­er­a­tional trans­fer of wealth is loaded with un­cer­tain­ties. Fac­tors such as in­creas­ing longevity, ris­ing health- care costs and taxes can de­plete the value of port­fo­lios your clients ex­pect to in­herit.

Wil­liams sees the wealth trans­fer as a “real risk” in which the value will be heav­ily discounted. Some el­derly clients, he says, are spend­ing too much.

Hol­je­vac adds that many peo­ple have debt and mort­gages head­ing into re­tire­ment, which means that there will be less to leave to their chil­dren.

Con­versely, el­derly clients may be gift­ing too much to their chil­dren too soon, putting them­selves at risk of hav­ing in­suf­fi­cient funds dur­ing re­tire­ment, she says. mis­take: ig­nor­ing in­surance An­other mis­take some clients make is pay­ing in­suf­fi­cient at­ten­tion to in­surance, Wil­liams says. The older clients get, the higher the prob­a­bil­ity of dis­abil­ity and critical ill­ness and the need for long-term care, says Ma­lik. Clients should un­der­stand that in­surance can help off­set the cost of th­ese po­ten­tial life events and pre­vent the need for dip­ping into re­tire­ment sav­ings.

In ad­di­tion, life in­surance can off­set the costs of pro­bate fees, in­come taxes on deemed dis­po­si­tions and other ex­penses re­lated to es­tate plan­ning — costs that can be a bur­den on a client’s fam­ily.

Many clients think of re­tire­ment sav­ing as a “cur­rent ex­pense for a fu­ture ben­e­fit, with no in­stant grat­i­fi­ca­tion,” D’An­drade says. That’s why they tend to have a short-term fo­cus when plan­ning for re­tire­ment. Thus, it’s your role to bring clients in line when de­vel­op­ing their long-term re­tire­ment plans.

The key to suc­cess­ful re­tire­ment plan­ning, Ma­lik says, “is to de­velop a trust­ing re­la­tion­ship with [clients] so that they can dis­cuss all is­sues with you and know that you will come back with un­bi­ased, hon­est ad­vice.”

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