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By Jonathan Chevreau,
National Post
Advisor Post
Monday, October 30, 2006 |
In its advertising of the retirement lifestyle, the financial industry tends to project a warm and fuzzy glow of vibrant seniors on cruises, tennis courts or walking hand in hand on beaches as the sun goes down.
Adrian Mastracci, portfolio manager at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "The underlying thread of the speakers was to make the advisor think and dig deeper into the topic."
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| "Retirement is about more than cruises, sunset walks on the beach and tennis matches or golf games at the club. Divorce, long-term care and estate planning are realities for the golden years of most Baby Boomers' lives." |
The reality financial planners are bracing for is considerably rougher, involving long-term care, divorce, charitable giving, estate planning and performing raw calculations of whether their clients may run out of money before they run out of life. As Bette Davis once said, "Old age is no place for sissies."
These issues were the focus of the fourth annual symposium of the Institute of Advanced Financial Planners (IAFP), held last week in Victoria, B.C. Colourfully titled Beyond the Georgia Strait: As Flower Power Fades, the sold-out symposium attracted 125 of the 432 holders of the Registered Financial Planner (RFP) designation. "Ageing hippies are now confronting reality," says conference organizer Lenore Davis.
While I didn't attend myself, advisors who did felt it more than delivered what they were looking for. "The underlying thread of the speakers was to make the advisor think and dig deeper into the topic," says Adrian Mastracci, president of Vancouver-based KCM Wealth Management. "For example, on ethics the process is important and the key is to first investigate the values of the client."
Warren Baldwin, was surprised to find a session he expected to be a "super yawner," Richard Stebeck's talk on "little known tips to maximize social benefits" turned out to be an eye-opener on how low-income individuals can milk the system. Stebeck, a client service officer with Human Resources and Social Development Canada., assured everyone both the Canada Pension Plan and Old Age Security are "on solid financial ground." He also showed how the Canada-U.S. treaty on social security might be used to help Canadians with inadequate U.S. Social Security contributions claim their benefits.
Older clients are not immune to divorce, one of the most financially expensive events that can happen in one's life, according to 61% of those polled in a 2004 survey by Investors Group. This study was cited by consultant Doreen Gardner Brown, who showed how "collaborative practice" can help provide separating couples with constructive mutual advice. So how costly is divorce at this stage of life? More than a third of respondents said they had to go into debt, 28% had to sell personal assets, 27% had to sell financial assets and 22% had to get financial support from family or friends.
A perennial hot topic at such events is strategies for generating sustainable portfolio income in retirement. Paul Peters, a financial planner with Phillips, Hager & North Ltd., presented an update to a 2004 paper on the topic. As we saw with the unveiling of Manulife's Income Plus, the Baby Boom generation will soon want to convert their portfolios into income-generating machines. Peters noted that during the next 18 years, a third of Canada's population will turn 60 and make this transition. Or as Investor Economics Inc.'s Earl Bederman told the recent IFIC conference: "More and more households are moving off the tax-deferred highway on to the exit ramp."
The challenge of generating income has been made more difficult by the trend to convert corporate defined benefit pension plans to more market-sensitive defined contribution plans. Financial planners have an opportunity here, Peters said, noting that "while the financial services industry arguably responded well to the challenge of providing Boomer clients with asset gathering/accumulation tools, it has not achieved a comparable status with respect to the income generation challenge faced by this ageing cohort."
The PH&N article, Retirement Withdrawal Rates, showed the trick is for advisors to help clients find the optimum withdrawal rate. "Draw too little and they may needlessly lower their standard of living; draw too much and they will run the risk of outliving their retirement capital." Drawing on findings of William Bengen, Lee Eisenberg and Jim Otar, PH&N concluded that "planning for an initial withdrawal rate in the range of 4% to 5% is a reasonable guideline for those wishing to sustain an inflation-adjusted income from their portfolio throughout their lifetime."
Note that a safe withdrawal rate does not equate to a portfolio's long-term compound annual return. PH&N says the rate should be 2% or 3% below the return of the portfolio.
Because of sequence risk -- the order in which bull and bear markets proceed in retirement -- the safe withdrawal rate is generally set below the expected annual return of the portfolio. PH&N says late retirees may be able to take on a higher withdrawal rate of 6%, while early retirees may need to use a more conservative 3% or 4%.
Another concept is what PH&N calls liability-driven investing, and some call asset dedication. This involves setting aside enough investments in low-risk asset classes to meet near-term income payments, putting the balance in riskier growth vehicles. This is not unlike how pension plans meet future liabilities and, according to PH&N, "can be equally applied in helping private clients."
Peters said most retirees would benefit from allocating at least 50% of their portfolios to equities (Bengen specified a range of 37% to 67%). Advisors may need to get clients to change their thinking "from a mindset that views risk as the likelihood of sustaining an absolute loss ... to one that centres on the risk of portfolio assets not meeting a defined stream of liabilities."
Even assuming one dodges the hazards of divorce and portfolio mismanagement, at the end of retirement looms soaring health care costs and possibly long-term care. Peter Silin, principal of Vancouver-based Diamond Geriatrics Inc. described how the transition to long-term care can be managed. At some point, family members or their advisors may have to visit such facilities. Silin provided a checklist of key points to consider. Are there, for example, medical reminders, or programs for special areas such as Alzheimers, or accommodations for those who are visually or hearing impaired? Is there 24-hour nursing care or group recreational activities? Silin is also the author of a book on this subject: Nursing Homes: The Family's Journey.
One way to cover the costs of such care is to purchase long-term care insurance well before it is actually needed. Although, Howard Dixon, a semi-retired RFP with Dixon, Davis & Co., said such insurance generally needs to be sold, as does life, critical illness or disability insurance.
The next IAFP conference will be held Sept. 27 to 29, 2007 in Montreal.
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