client meeting

When Canadians think ahead to their retirements, they express a prevailing attitude that advisors hear time and time again: a lack of confidence.

According to research conducted in 2021 by Mackenzie Investments and Pollara Strategic Insights, only 29% of Canadians said they knew exactly what to expect when they retired, and only a third were very confident in their sources of income during retirement.

To add to this uncertainty, Canadians are living longer, defined-benefit plans are on the decline and inflation is high.

To account for this new reality, advisors must shift their focus away from the typical retirement narrative of saving and investing for the future to how to help clients reconstruct their retirements, make the most of their accumulated wealth and live a purposeful retirement.

Design the retirement journey

The first question to ask your clients is, “What do you want to do in retirement?” Would they like to travel several times a year? Do they want to pursue a new hobby or passion? Do they want to do more than golf every day?

How are they going to spend those extra 2,000 hours a year?

By having clients really think about what they want the retirement journey to look like, you can provide them with personalized solutions.

To get there, advisors must engage in mindful and insightful discussions with clients to better understand their unique situations. This might include prompting them to articulate their goals and anxieties around retirement, asking them to share their concerns and emotions about it and actively listening to their responses.

Connect retirement goals to financial reality

Understanding what clients want to achieve in retirement is the only way you can truly assist them in the transition, connecting their non-financial needs to their financial reality.

You need to consider several things when determining your clients’ financial capacity, such as how much income is required to meet their retirement goals and if their portfolios support the desired income. You will also want to think about how you can reduce your clients’ taxes or optimize after-tax income so they can get the most out of their assets. Things like the order of asset withdrawal and when to take government benefits like the Canada Pension Plan/Quebec Pension Plan and Old Age Security can have a material impact on after-tax income and estate value.

Finally, determine whether clients want to leave an estate or if they would prefer to bequeath money to their loved ones along the way so they can see their heirs enjoy it.

Revisit the plan regularly

After an initial retirement plan is established, it’s not OK to just “set it and forget it.” The plan needs to be revisited regularly to assess changing needs and conditions. If an adjustment needs to be made, an advisor can help the investor by making some revisions to the portfolio in line with their personal risk profile. If the view is that interest rates will continue to rise and higher inflation will persist, advisors can consider several options.

In general, to combat rising rates, you can lower the duration of both equity and fixed-income holdings. In the equity sleeve, this could be implemented by increasing exposure to high-quality dividend-paying equities or tilting equity exposure to value versus growth companies. In the fixed-income sleeve, you could purchase floating-rate notes or shorter-term investment grade corporate bonds.

Options to manage inflation risk include increasing exposure to various real assets or alternatives such as real estate, infrastructure and commodities. This can be done in a variety of ways, be it directly investing in these assets or through mutual funds or ETFs. It could also be done by increasing holdings in the Canadian equity market given the exposure to energy and commodities in Canada relative to most other equity markets.

For those nearing or just starting retirement, the current market environment exposes them to sequence of returns risk because they’re withdrawing when the value of their assets is down. This can increase the risk that your client outlives their investments. To mitigate this, you can make use of the “cash wedge strategy” or “bucket strategy,” which involves having clients allocate up to two years of their income needs in cash or short-term fixed-income securities that don’t fluctuate with the stock market. This reduces or eliminates the need to draw on assets that are down in value.

When the market recovers, your client can then replenish the cash reserve and draw on their assets that have increased in value.

Shift the focus to decumulation

As clients transition from savers to spenders in retirement, their needs evolve. Because of this, they require a comprehensive investment and decumulation strategy that balances their needs for income, stability and growth to ensure they don’t outlive their savings in addition to a plan for how to spend and enjoy their money.

Investors’ portfolios still need to grow to offset inflation, especially since they can no longer rely on their wages rising over time to offset inflation as they did in their working years. But there are other options like delaying the receipt of government benefits, such as CPP/QPP and OAS, resulting in higher payouts that help hedge against inflation.

Advisors play an essential role in improving their clients’ confidence when it comes to retirement. The advisory industry needs to approach financial planning in a holistic way that balances clients’ personal goals with their financial capacity to achieve them, with continued support along the way. Retirement is a journey, not a destination.

Ron Hanson is senior vice-president, head of retirement, with Mackenzie Investments.