How do you help a retiree who is in the decumulation phase of life? Advisor Group’s Editorial Advisory Board provides insights.

Psychological concerns

Many retirees think their biggest risk is losing all of their money because there will be a market correction. But what they actually need to worry about is the fact that they’re going to enter 25 to 30 years of retirement [facing] rising costs due to inflation. And there will be things 10 years from now that don’t exist today. Think back to anyone who retired in 1990. What was their cellphone or Internet bill? They didn’t have them. So we tell them not to worry about protecting their capital, but their income. Don’t protect the dollar; protect what the dollar buys.

–Darren Coleman, PFP, CFP, CIM, FMA, FCSI, Raymond James, Toronto

Before retiring, ask clients to visualize what their days, weeks and months will look like. [Ask them] to verbalize what excites them the most and what they’re most afraid of. The part that they are afraid of often stops retirees from fulfilling lifelong dreams, especially if that fear is running out of money.

–Janine Guenther, CFA, CMT, CIBC Wood Gundy, Vancouver

When people go from an RRSP to an RRIF, there’s a huge psychological impact because they think they need to maintain the value of that registered account—but they can’t. So I’ll say, “Look at your registered account, and think that about 40% of it (or more depending on the province) belongs to the government. Look at it as if a portion goes to the government and a portion to you.”

–Beth Hamilton-Keen, CFA, Mawer Investment Management, Calgary

Income-planning analysis is important. As clients enter retirement, they struggle with moving away from saving into spending mode. I test out semi-retirement first. See how the client survives on smaller amounts of income (if that’s the case), and dipping into savings to supplement any shortfalls. Help revise his budget or spending to match a healthy drawdown with his savings.

–Rhonda Sherwood, CFP, FMA, Raymond James, Vancouver

Tax, estate and insurance advice

In determining life insurance needs for retirees, consider taxes based on the deemed disposition of assets when they die, or the last to die between the client and his or her spouse. Also consider additional liquidity requirements for the spouse to pay off any debts or replace income that would stop on death (e.g., CPP). We also suggest they consider a charitable bequest or charitable insurance contract.

–David Wm. Brown, CLU, ChFC, CHS, TEP, Al G. Brown and Associates, Toronto

Plan for how clients will pay income taxes during retirement. Taxes will often not be withheld at source (like they are for employment income), and clients may have to start paying quarterly tax installments. By planning the accounts from which retirement withdrawals are made (non-registered savings, TFSAs, registered plans) and the type of investment income generated (capital gains, eligible dividends, regular dividends or other fully taxable investment income), retirees can exert some control over their income taxes. Financial decisions shouldn’t be made primarily to minimize taxes, but they are an important consideration.

–Cynthia J. Kett, CPA, CA, CGA, RFP, CFP, TEP, Fellow of FPSC, Stewart & Kett, Toronto

Retirees need to identify their wishes to PoAs and executors, including what’s going to happen if they’re incapacitated. And they should keep their financial information current, documenting bank accounts, investment accounts, pension accounts and other relevant financial statements. This could be as simple as a Word document that gets updated every six months or year, summarizing where the will is and when it was last updated. The document should also include passwords for all accounts, including those online. It’s not wise to send electronic copies of passwords over the Internet, but the retiree should tell his PoA where to find this information should anything happen.

–Bev Moir, FCSI, CLU, ScotiaMcLeod, Toronto

Portfolio considerations

Focus on what income is attracting taxes to determine which bucket a client should spend from. If she’s already in the highest tax bracket and always will be, defer RRIF withdrawals until they’re mandatory, and only withdraw the minimum. Spend from other sources of tax-paid income if she has non-registered portfolios. If she’s not in the highest tax bracket, should she take money out? Yes, if she’s in the marginal tax bracket of 30% or lower, it makes sense to take money out earlier than RRIF age, keeping in mind the OAS clawback threshold. Also defer spending from TFSAs—that’s the last bucket she should ever spend from. The same is true for any tax-sheltered accumulations in permanent life insurance plans.

–Cindy David, CFP, CLU, FEA, TEP, Cindy David Financial Group, Vancouver

Having a cash position to meet near-term financial needs, and a fixed-income allocation to provide capital security insulates retirees from the volatility of equity markets. Equity provides growth that protects wealth from the erosion of purchasing power by inflation, and fixed income provides capital stability when equity markets are volatile. Regular rebalancing annually moves realized incomes and capital gains from equities to the capital preservation side of a client’s asset mix, where it can be converted to cash as needed. If a client had a 30% position in Canadian equity, then his trigger for rebalancing could be 5% to 10% in either direction, depending on his risk tolerance.

–Nicholas J. Miazek, CFP, ScotiaMcLeod, Calgary

I’m not a fan of restructuring investments to chase yield for income. A well-diversified portfolio with income distributions in the form of capital, and dividends and capital gains can generally provide income requirements on a more tax-effective basis. Modeling this for clients is very helpful. Determining income requirements and a long-term plan to meet them is critical. All of our clients go through a risk profile that we use to determine the optimal asset allocation for them. This helps us determine equity allocation. Most accounts are 40% to 50% in diversified equity holdings. We then further diversify with Canadian, U.S. & global equity ETFs.

–Terry F. Ritchie, EA, RFP, TEP, Cardinal Point Wealth, Calgary

If someone’s portfolio has accumulated a certain amount of capital, those assets must be invested in such a way that the money produces income (e.g., return through dividends, interest, rents from real estate investments). If you add up all the cash flow and it comes to a 4% yield, and we can limit our client to spending less than that 4%, then he’ll never be in a position to spend that capital just to maintain lifestyle income. If the plan is to sell capital, markets may not be in his favour. If he should sell at a loss and spend that capital, he can’t ever make it back.

–David Sung CFP, CLU, CHS, CIM, Nicola Wealth Management, Vancouver