This article was originally published in 2011.
A number of years ago an elderly woman lived in western Toronto. She would come into her local bank branch from time to time dressed poorly and looking disheveled. Her hydro was cut one day because the bill was not paid.
By her appearance it was clear that she didn’t have much to eat. Rumour had it she lived off coffee grinds and cat food. The people who worked at the local bank branch would see her come in periodically and pitied her, but no one really knew her well.
One day news arrived she had died and her estate had gone into probate. Likely, her meagre possessions would be divided amongst her family (if she had any). She had a safety deposit box, though it seemed odd she would need it. It was rarely, if ever, accessed since it had been opened many years ago.
When the contents were examined there were only some pieces of paper. It turned out they were old stock certificates from one of the major banks. The stocks had split multiple times and it turned out she was not poor at all. She was a multi-millionaire.
How sad it was to think of how she had lived. She had so much more than most and yet enjoyed none of it while she was alive.
This story highlights one of the two worst financial outcomes that clients fear most: dying wealthy while enjoying none of the benefits or “going broke safely,” otherwise known as outliving money while still alive.
Average effective age of retirement versus the official age, 2002-2007
Source: OECD estimates derived from the European and national labour force surveys.
As an advisor, one of the most stressful questions asked by clients or prospective clients is, “How much do I need to retire?” Many advisors have built their practice on accumulating wealth, not depleting it. However, numerous studies have revealed that advisors who are perceived as experts in retirement planning and estate planning are often the ones the client consolidates their assets into, not away from, as they approach retirement.
Another tough question once the client finally achieves their retirement date is, “How much can I afford to live on or take out each year?” Naturally, this question has many assumptions built into it, but there are five golden rules worth sharing.
- Clients will not decrease their pre-retirement spending during the first few years of retirement. Why? They are young, healthy and finally able to do the things they have always dreamed of, such as travelling and golfing.
- Plan for increasing longevity. The average person will retire today at 61 years of age and live almost three decades in retirement. Why do people retire at all? Germany was the first country to introduce retirement in the 1880s. The business risk was low since they had set the age near the mortality age. Today, however, it is likely that if a couple is still alive at 67 years of age, one of them will still be alive three decades later.
- Keep the withdrawal rate as low as possible for as long as possible, despite the increasing desire by many clients to spend in their early retirement years. If possible, keep their withdrawal rate under 5% in the early years and increase if needed as they age. Keep in mind this is just their withdrawal from their portfolio, which is not inclusive of their pensions, OAS or CPP.
- Plan for discretionary health care expenses, which could be in the form of retirement housing, cross-border health care or even potential amendments to the Canadian system.
- Help the client to avoid “going broke safely” by not allowing them to get too conservative too quickly. The increasing focus on capital protection is apparent in virtually every advisor’s book of business. While clients may like the return and safety bonds have generated over the past decade, it is important the average client has some equities well into his or her retirement years. This will be even more necessary if we experience a continued rising interest rate environment.
The golden years are meant to be just that – not a time when clients have to cut back like the poor lady who thought she had to live like a pauper. Unfortunately, outliving money will be a more likely scenario for the many Canadians who have not properly prepared. This risk will be a powerful force that drives clients to realize an increased need for financial advice.
Like never before, the aging population of Canada needs the strong leadership and direction of advisors. Those who understand the importance of preparing their business for investors’ retirement needs can make sure clients don’t wind up somewhere unexpected.