Many clients have worried so long about saving enough for retirement that they find the transition to the “decumulation” stage of life difficult. They have derived satisfaction watching their retirement funds grow into a fat, golden nest egg through years of disciplined contributions. But come time to eat the egg, clients can be plagued by anxiety and reluctance, even though they often have far more retirement savings than they need.

“People tend to be anxious and fearful about money – that definitely is an issue – and some are reluctant to draw down their nest eggs,” says Debbie Ammeter, vice president of advanced financial planning with Investors Group Inc. in Winnipeg. “For some, spending gives less pleasure than saving. But, in many cases, clients would enjoy spending more if they had a fuller picture of their circumstances. It’s sad when people don’t do the things they want because they wrongly think they can’t afford to.”

Many clients and financial advisors adhere to conventional rules of thumb that suggest clients must save enough to provide a retirement income equal to 70%-80% of previous working income, when this metric may be far beyond what’s needed to maintain a comfortable lifestyle. Or clients may be working into their 70s to create a security blanket that will last them through years of expensive longevity.

Some clients are so intent on ensuring abundant financial resources to sustain them for decades that they forget the clock is ticking on how much time and good health they have left. Clients may prepare for the worst by hoarding, but, in the end, have far more than they need. They could have worried less and had more fun, or given more support to important charitable causes or family members during the clients’ lifetime.

Says Jason Heath, a fee-for-service advisor with Objective Financial Partners Inc. in Markham, Ont: “Some people almost feel guilty if they’ve been saving diligently their whole life, and they can be overly prudent with their spending in retirement. They get attached to having a nest egg of particular size and, if it dips below that, they get concerned. The majority of my clients could spend more, and they don’t need to work as long as they actually do.”

Increasingly, the role of an advisor is to personalize retirement planning to every individual client’s savings ability and lifestyle possibilities rather than relying on standard industry assumptions regarding the percentage of working income that will be needed in retirement or a withdrawal rate that’s carved in stone.

Often, these rigid guidelines result in saving too much or spending too little. Instead, annual monitoring and a willingness to adjust to changing circumstances are tools that can create realistic retirement spending behaviour that will last through various post-work stages in the final third of life. Retirement is an evolving process rather than a one-time event, and requires practical testing and continual adjustment.

“I have many clients who have the ability to spend $10,000 or $15,000 a year more, but they can’t bring themselves to do it,” says Wayne Rothe, certified financial planner with Wayne Rothe & Associates Wealth Management, which operates as a branch of Manulife Securities Investment Services Inc. in Spruce Grove, Alta. “Another couple in their late 70s are terrified of running out of money and are bunkering down in their house. They’ve worked for 40 years to get to a point at which they can live well in retirement, and now they’re afraid to. Persuading them to spend more is hard: extra security seems more important than spending.”

A recent survey of newly retired or soon-to-be retirees by Investors Group cited a new “retirement risk”: the risk of “underliving” or forgoing meaningful experiences for fear of overspending. The survey found that 64% of retirees find striking a balance between enjoying retirement and making money last difficult to do.

However, the survey discovered more optimism among people who work with advisors. Only 58% of survey participants who worked with an advisor had the same concerns, while a significantly higher 71% of survey participants who didn’t work with an advisor felt that finding a balance between living for today and saving for tomorrow was difficult.

“Clients often are more comfortable spending if they receive regular financial reviews along the way to see the impact of investment returns and withdrawals,” says Ammeter.

Retirement experts such as Malcolm Hamilton, retired senior partner from the Toronto office of human resource consulting firm Mercer (Canada) Ltd. and now a fellow at the C.D. Howe Institute, along with Fred Vettese, chief actuary at consulting firm Morneau Shepell Inc. in Toronto, maintain that most people can maintain a comfortable lifestyle on 50% or less of their pre-retirement income. Typically, these retirees have paid off their mortgages and raised their children, are in a lower tax bracket, are not contributing to RRSPs and are spending less on material goods such as cars, art, cottages, furniture and clothing.

Although many retirees worry about rising health-care costs later in life, Vettese says, this may be an exaggerated fear. Long-term care (LTC) usually isn’t needed until the age of 80 or later; at this stage, the length of stay in a LTC residence is two years or less for most people.

“While there probably will be a deterioration in health later in life, and many people will need some assistance, the cost typically is manageable,” says Hamilton. “Typically, this stage lasts a few years, not a decade; and when you get there, you’re not spending on anything else. The richest guy in the nursing home can only do so much.”

Hamilton, who became an active retiree at 62, says much of his time is spent doing things that don’t cost much, such as reading, walking, cooking, watching sports and movies, and spending time at his cottage.

“Many people who spent their lifetime building an asset base would prefer to count their cash or watch it grow in retirement rather than spend it,” Hamilton says. “They’re uncomfortable encroaching on capital; they figure if they don’t spend their nest egg, they won’t run out of money.”

But retirement planning is not a case of “one size fits all.” Income needs vary according to the circumstances and desired lifestyle of individual clients, and advisors must ask probing questions of clients to determine the lifestyle they desire in retirement – and how much that will cost, Ammeter says.

Advisors also need a full picture of all of a client’s resources, including government benefits, registered and non-registered savings, and any employment pensions. The next step is to use software and spreadsheets to run projections using various scenarios, such as spending more or less than estimated, or making a greater or lesser annual return on investments than the 4% that often is used as a starting point for asset drawdowns in retirement.

“An annual review is important to update what’s been spent as well as the investment returns achieved, and to adjust if necessary,” Ammeter says. “If clients are heavily reliant on an investment portfolio for most of their income, they may need to draw less if there has been a down period in financial markets. That could mean still taking a trip, but on a less grand scale. An advisor also can assist with tax-minimization strategies, focusing on investments and strategies to maximize the amount of after-tax income available to spend.”

Clients, through understanding what might happen under various circumstances, can have a better idea of what they can spend and what events might require making adjustments, Ammeter says. In making calculations, adjusting the income required at different stages in the client’s life also is important. For example, a client might be withdrawing an annual income based on 5% of their original portfolio assets in the early years of retirement, but may need only 3% after age 80.

Typically, people spend more in the early stages of retirement, but this spending tails off after age 75 until their final years, when retirees may be spending more on health care. Clients may have more to spend in the earlier years of retirement if they know they will not need as much later on to finance a more toned-down lifestyle, Ammeter says. Different lifespans with different income requirements can be modelled for clients, she adds, by doing projections to age 90, 95 or 100.

Vettese, author of The Essential Retirement Guide: A Contrarian’s Perspective, estimates that retirees’ spending drops by 1.25% a year between the ages of 65 and 70, by 1.75% annually between 70 and 80, and by 2.7% annually from 80 to 85.

The U.S.-based Employee Benefit Research Institute used age 65 as a benchmark in a survey of retirees. That survey found household spending dropped by 19% by age 75, by 34% by age 85, and by 52% by age 95.

Even small changes in the average portfolio return can make a big difference in the value of a nest egg and the amount available for consumption. Ted Rechtshaffen, president and CEO of Toronto-based TriDelta Financial Partners Inc., points out that a client with $1 million who withdraws one percentage point less than the actual return on their portfolio after retirement – taking out 3% instead of the 4% earned, for example – could end up with significant wealth at the end their life. On the other hand, a client who withdraws one percentage point more than the portfolio is earning and erodes the principal runs a serious risk of outliving their money. Clients on the right side of this “tipping point” are getting wealthier every year, even in retirement, he says.

Considering the substantial equity that some clients have built up in their homes also is important, especially in popular markets in which house prices have skyrocketed in recent years. (See story on page 29.) Rechtshaffen says the home frequently is retirees’ largest asset and, in cities such as Vancouver and Toronto, the home can make up as much as 75% of net worth. Even if real estate prices taper off, a home that has increased in value during a client’s lifetime can provide a source of funds to finance the final stages of life as the client downsizes in the same city or moves to a less expensive geographical location, rental situation or some form of assisted living.

For some clients, having this asset “in their back pocket” can make loosening the purse strings easier in the earlier, active years of retirement. According to research conducted by Toronto-based Fidelity Investments Canada ULC, 36% of retirees expect to use home equity as a source of funds. Numbers from Statistics Canada show the average net worth of the top 20% of Canadians has risen to $1.4 million, with real estate being a significant component.

For those clients who are reticent spenders despite having ample means, Ammeter suggests encouraging them to “dip their toe in the water” and do something affordable. At the end of the year, you can show them where they stand financially and give them reassurance, she says. Going forward, those clients can make a more informed choice about their level of spending rather than a fear-based choice, she adds.

“Being concerned is fine, and clients shouldn’t put their head in the sand,” says Hamilton. “But the grinding anxiety that the fates will conspire against you in some dire fashion – ditch that idea. Most estimates of what people will need in retirement are inflated, and folks are scared into saving too much.”


Fred Vettese, chief actuary with Morneau Shepell Inc. in Toronto, suggests that security and willingness to spend in retirement can be enhanced by income from an insurance annuity, best purchased at around age 75 rather than in early retirement to take advantage of better rates offered to older people. He suggests that the fixed-income component of a portfolio that normally would be placed in guaranteed investment certificates or bonds should be directed toward an annuity after age 75 to provide a steady stream of tax- efficient income. The downside is that the portion of assets spent on an annuity may not be available for heirs. (See story on page 25.)

Having a portion of income that is guaranteed, no matter how long a client lives, can go a long way toward providing the peace of mind that clients need when drawing income from their retirement savings. If a client can create a stream of steady, consistent income from a combination of Canada Pension Plan (CPP) and old-age security (OAS) benefits, annuities and any defined-benefit company pension to cover their basic living expenses, that client may feel more comfortable investing the remainder of their savings in securities or mutual funds that are growth-oriented, but potentially more volatile.

Vettese is a proponent of delaying government benefits such as CPP and OAS to age 70 whenever possible, thereby increasing the amount of guaranteed, indexed income in later years and resulting in less reliance on investments and less vulnerability to financial markets’ fluctuations when clients are older and less able to manage their money.

Waiting until age 70 to draw CPP benefits means the CPP payout is 42% higher than if it’s taken at age 60 (and could be even more, depending on wage inflation), while the OAS payout would be 36% higher. (See story on page 26.)

This strategy would mean clients must withdraw more from RRSPs in the years between ages 65 and 70 to make up for postponed government benefits, or even work a few years longer. More and more people are working beyond age 65 – sometimes for financial reasons; sometimes for the intellectual stimulation, sense of accomplishment and social contact that a job provides. “If people can maximize those payments that last a lifetime, such as CPP and OAS, that can help in maintaining a steady income and reducing stress,” Vettese says.

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