Growing income during retirement

By Fred Pinto | February 1, 2010 | Last updated on February 1, 2010
7 min read

Every RRSP season, we try to think up clever campaigns in an effort to mine retirement assets – I like to call it the Old Rush.

Here’s a message that is guaranteed to get a prospect or client’s attention:

As much as 60% of retirement portfolio growth can come from investment returns earned DURING retirement. In other words: Just because you’ve stopped working, doesn’t mean your investments have to.

As a result, investors worried about what current market conditions are doing to their retirement nest eggs can breathe a sigh of relief – there may be time to make up for losses. According to research from the Russell 10-30-60 Rule of Retirement, investment earnings during retirement could come from 10% initial savings during the working years, 30% pre-retirement investment growth, and as much as 60% from growth after retirement – this all depends on having the right asset mix of bonds and equities.

Most of your prospects and clients will find this new message to be mind blasting, especially those with significant assets off to the sidelines in GICs and high interest savings accounts (although these moves are understandable in light of the tremendous market volatility that’s impacted investors).

But the reality is most clients simply have no idea how much income potential their retirement portfolios can generate.

A poll from a few years ago by Russell and Harris/Decima of investors aged 42 and over with household incomes of $50,000 or more, revealed that 88% of investors don’t know the bulk of their investment income in retirement can be generated from growth that occurs during retirement.

In the same poll, we also discovered investors believed that 49% of their retirement income will come from money saved during their working years. Meanwhile, investors think the growth of their pre-retirement savings will provide for 31% of their spending in their golden years. Those same investors thought only 20% of their investments will play a role in providing income during retirement.

Interestingly, we found the much coveted High Net Worth investor was most likely to have misconceptions about how their retirement income would be generated.

You might think people with the business savvy to amass considerable wealth would also have investor savvy, but the results show high net worth investors are most likely to be off the mark when it comes to retirement planning. Surveyed investors with a net worth over $750,000 believed only 8% of their retirement income will come from investment growth during retirement.

These investors, more so than others, mistakenly think that 63% of their retirement income is going to be derived from the money they’ve saved during their working years. There is an amazing opportunity right now for advisors to help HNW investors understand how their portfolios could be put to work during retirement.

Since many Canadians are unaware their portfolios can generate income during retirement, many have their savings in GICs and high interest rate savings accounts. According to Ipsos Reid, there is approximately $300 billion in assets just sitting idle in GICs and high interest rate savings accounts. This is not just an opportunity for advisors to go out and get that money, but also to help clients make the most of their savings and put their money to work.

Growing in the Golden Years

In the workshops he runs for clients transitioning to retirement, ScotiaMcLeod advisor Paul Delfino estimates more than 80% of investors he works with still think they’ll have to live off their work savings in retirement.

“The danger is that a couple living off their savings could go 10 years into their savings before they realize that they won’t have enough to live on. Inflation, the silent killer, will sneak up on them if they don’t put their investments to work. To help clients avoid this dilemma, we’ve started a program called the Financial Peace of Mind ConversationTM – a series of discussions that educates clients about portfolio growth in retirement, rather than just pushing product,” says Delfino, who started this planning process last year and has brought in over $10 million AUM in new business.

One of Delfino’s most effective retirement planning tools is a simple stamp.

“I have a stamp from 1979 that I like to show clients. It costs 5 cents. Then I show them a stamp today that costs 54 cents. And suddenly they realize the impact of inflation and understand the importance of their real rate of return,” says Delfino.

“From there, clients are all ears when we try to set up a personal retirement income plan that they can comfortably withdraw from and live off of,” he adds. “Successful retirement planning starts with investor education and ends with genuinely trying to help clients towards a worry-free retirement where they don’t have to worry about longevity risk.”

Over the past five years, Cyrilla Saunders, an advisor with RBC Dominion Securities based in Prince Edward Island has positioned her practice so that most of her $80 million book of AUM is comprised of assets being positioned for retirement cash flow needs and planning. Coincidently, none of her clients are in GICs.

“We utilize a total wealth management approach. Most of our clients are not just concerned about RRSPs when it comes to retirement. We consider of all their assets, real estate investments, the entire big picture. Our job is to safeguard what they have,” she says. “A 3% rate of return is not enough for our clients. We have no clients in GICs. Instead, we have found that a 35/65 portfolio structure has been very effective in preserving capital, and at the same time, paying out a 5% monthly rate of return for essentials spending during retirement.”

Saunders switched from a transaction based business to focusing on wealth management and has gone from 550 family member clients to 170. By doing that, she’s seen her book double in AUM over the past eight years. New clients average over $1 million in AUM.

“Other strategies include corporate class fixed income and managed yield for non-RSP investments. Managed-yield fixed income can produce a 4% to 5% rate of return that is more tax-efficient than just investing in bonds, since the clients have to pay taxes only on the capital gains rather than the interest income,” she notes. “We are very committed to helping our clients take advantage of these strategies. Granted, they’re not exciting, but they’re very efficient. Our clients would not be surprised that most of their retirement spending will come from investment growth during retirement, because we’ve educated them throughout the retirement planning process. No surprises.”

Bev Evans, an advisor for Richardson GMP in Mississauga, has made sure her clients are fully aware that investment growth does not have to end during retirement. She says the strategy has resulted in loyal client relationships.

“It’s all about education and keeping in contact with clients. It makes a huge impact. When it comes to explaining to clients how retirement income can come from investments, I like to use drawings to talk about essentials, lifestyle, estate — a retirement spending process created by Russell,” explains Evans.

“I’ll use modeling software to position their current savings, rate of return, and then set up a target income in retirement based on their essentials spending needs, lifestyle needs, and estate planning needs.”

Evans recalls one client who was working into her 60s because she didn’t realize her investments were enough to pay for her essentials and lifestyle retirement spending. “She was a widow, working in the non-profit sector, making over $70,000 a year. She also had a sizable investment portfolio, which included money from her husband’s estate, that was worth over $700,000,” says Evans.

“When we talked about retirement, she said that she would often go to Florida every winter for vacation and walk along the beach. She wished she could live in Florida and walk along the beach everyday when she retired. I told her straight: Working now is actually hurting you. By generating employment income, plus your investment income, you are compounding your taxes. You can retire now and easily live off your investments without depleting the capital too much… Imagine telling someone they don’t have to work another day in their life! It was an awakening for her. And one of the most satisfying moments as an advisor for me.”

Using planning software, Evans was able to show the client how her investments could still be working, even while she’s retired. Since the client could easily get income from her husband’s estate, Evans put her into a 40%/60% portfolio so that the client’s funds could still grow in retirement. The client soon quit her job and retired after consulting with her children. Both her adult children are now clients as well, and both now understand that their work savings alone won’t have to carry the burden of their future retirement spending.

Many advisors, such as those featured here, have done a great job of educating clients about the importance of portfolio growth during retirement. However, the Harris/Decima research suggests that many Canadians in the 42-plus age group still think their work savings will be their primary retirement income option. As a result, there are hundreds of millions of idle assets sitting on the sidelines in GICs and high interest savings accounts. That money is just waiting for advisors who can effectively educate investors and get this message across to clients: 90% of investment earnings during retirement can come from growth, and a significant majority of that growth can take place after you retire.

It’s the kind of talk that could pay-off for you and your clients in the long-run.

Fred Pinto