As a massive cohort of Canadians moves towards retirement, financial planners have an important role to play in helping them plan for their retirement income needs, according to Michael Banham, vice president of wealth distribution with Sun Life Global Investments (Canada) Inc.
At the Canadian Institute of Financial Planners (CIFPs) annual conference in Niagara Falls on Monday, Banham highlighted the opportunity for advisors in the retirement planning market. He pointed out that every day, an average of 1,000 Canadians turns 65 – and this will continue for the next 20 years.
Many of these Canadians, however, are not financially prepared for retirement. According to Statistics Canada, the average nest egg is just $225,000 – a number which falls considerably short when compared with the $46,000 of income that Canadians expect they’ll earn per year in retirement.
“That’s a bit of a disconnect,” Banham said.
Furthermore, the looming wave of new retirees comes at a time when a weak economic backdrop and historically low interest rates are hampering the ability of investors to earn sufficient rates of return. This further underscores the need for advice and guidance as these investors approach retirement, Banham said.
“The challenges around income investing today have never been higher,” he said. “This is a call to action for us to be working with more Canadians in order to help them drive for financial success.”
Conversations with clients about their retirement income needs should focus on four main facets: basic living needs, health, lifestyle and legacy.
1. Basic living needs
The retirement income discussion should begin with basic living needs, Banham said, since those represent the fixed expenses that clients cannot live without – items such as food, housing and transportation.
To cover these expenses, advisors should look at any sources of guaranteed income that a client will have in retirement, such as Canada Pension Plan (CPP), Old Age Security (OAS) and if applicable, a defined benefit pension plan.
If a client’s guaranteed income falls short of the amount they’ll need to cover their basic living needs, Banham suggests using a payout annuity or another income-oriented product to fill the gap in income.
The discussion around health-related costs, meanwhile, should send a message that clients need to be prepared to deal with sudden, unexpected costs. To help clients prepare, urge them to apply for health insurance, or if insurance isn’t an option, encourage them to self-insure by setting some money aside, Banham said.
“It’s important to have that health conversation, because it’s going to happen,” he said. “As Canadians mature, and as they move through this retirement phase, they’re going to have health events, and they’re going to have increased health expenditures.”
To fund lifestyle expenses, such as travel and entertainment, Banham suggested having clients begin to draw on their nest egg through systematic withdrawals. Help them calculate a rate of withdrawal that will be sustainable for the duration of their retirement.
Lastly, talk to clients about what kind of legacy they want to leave for their family and/or any charities, and the method by which they want to facilitate that transfer of assets.