Preserving the golden years
Retirement planning requires a logical wealthmanagement approach
Wealth management can take a different turn once retirement looms on the horizon.
“Retirement planning can get quite complicated because it represents different things to different people,” says John Hamilton, vice-president, RBC Wealth Management Financial Services Inc. “Every situation is unique in terms of goals, family situations and risk tolerance.”
Today’s Baby Boomers are dealing with more complexities than the previous generation as far as retirement needs are concerned, he says. There are more blended relationships, divorces, older children moving back home, and ailing parents to worry about. “There are many inputs that come into the discussion about what to do when you stop working and how you will fund it.”
In addition, fewer people heading to retirement can rely on defined-benefit pension plans. They’re also living longer and leading more active lives, so they need more money for longer periods of time. “As they live longer they typically consume more expenses. Often people underestimate the cost of health care in retirement and haven’t planned for it,” Hamilton says.
The best time to start thinking seriously about it, he says, is when a person is in their early to mid-50s, which is the time when they start seeing retirement around the corner. At that point, choices boil down to what’s important in their lives. Once that is established, it’s easier to find the right asset allocation that not only addresses how much one needs to live on, but also factors in planning for children and grandchildren where that’s a concern.
From a basic standpoint, a retirement portfolio needs to be structured in a way that delivers reasonable returns and ensures people don’t outlive their money, Hamilton says. That could mean choosing good dividend-paying, well-capitalized stocks along with laddered bonds to produce a predictable income. Depending on the profile, an investor might also consider options such as permanent (whole life) insurance or annuities. “Diversification ends up being really important. Planning around that needs to be very dynamic.”
The formal starting point for that planning is an investment policy statement that outlines an investor’s current situation, their objectives, risk tolerance
Diversification ends up being really important
and capacity. “That is by far the most important step in building a plan,” says Mark Bayko, vice-president and portfolio advisor, RBC WealthManagement.
An investment policy statement takes into account all the important factors that will come into play that determine liquidity and income needs, such as legal or personal financial commitments, business obligations, insurance and health coverage, health care requirements and time horizons.
It should also be reviewed regularly, Bayko advises. “It’s very important after you’ve built it to go back once a year, or more often in the case of complicated situations, to make sure you’re on the right path. Sometimes people forget why they are investing, so it’s a great reminder to help maintain their course moving forward.”
The information provided plays a key role in determining the right asset allocation for each investor. Someone whose goal is strictly capital preservation would have a different asset mix than one who is focused on growth or income generation. A very conservative investor interested in preserving capital and minimizing exposure, for example, may have 75% of their portfolio in fixed income, 20% in equities, and the balance in cash. Someone looking to strike a balance between capital preservation and growth might reduce their fixed income to 40% and increase their equity component to 55%. A growthoriented portfolio would have a higher equity allocation (e.g. 70%).
“As you age, your allocations will also shift,” Bayko says. “Initially you may be setting out your course 10 to 15 years before retirement. But as you get closer and your time horizon shrinks, capital preservation might come into the equation more.”
Tax planning is also an important element when planning a retirement portfolio. The key is to structure it in a way that person can live off the accumulated wealth while minimizing tax penalties.
Some options to consider include spousal registered retirement savings plans ( RRSPs) or registered retirement income funds (RRIFs) and income-splitting, which can be particularly advantageous where there is an age discrepancy between spouses. “These strategies can materially affect the value of your portfolio,” says Rock Lefebvre, vice-president research and standards for CGA-Canada in Ottawa.
When withdrawing from a RRIF, another thing to be mindful of is how that income may affect your eligibility for old age security. “Try to structure it so you don’t disqualify yourself,” Lefebvre says.
Whether engaged in investing or tax planning, Hamilton notes that getting advice is critical considering all the complexities that come into play. “People need to reach out to a professional advisor to set out performance goals, rather than benchmarking against what they hear from their neighbours or online.”