Canadians are living longer, are more active, and are seeking new ways to spend their golden years. Combine that with the decline of defined-benefit plans and the new inflationary reality, and retirees and near-retirees increasingly need the help of an advisor to develop a personalized retirement income plan to help reduce the risk that they’ll outlive their savings.
For financial advisors, this is a golden opportunity to help this important and growing segment of the population at a time when they’re likely looking to consolidate to one advisor to simplify and co-ordinate their strategy and reduce fees.
Why is this segment so important? According to the 2021 Investor Economics Household Balance Sheet, $3.7 trillion (two-thirds of Canadians’ financial wealth) is controlled by retirees or near-retirees. This is forecast to reach $6.4 trillion by 2030.
Therefore, this is an opportune time for advisors to reinforce their value and help their clients live a purposeful retirement by identifying retirement income possibilities and delivering innovative outcome-oriented solutions. Those advisors who can help their clients shift from a plan that has been primarily focused on growth to one that also prioritizes income and stability while guiding them in the pivot from saving to a tax-efficient drawdown will have an edge over those who don’t.
Below are some strategies advisors should consider as they seek to maximize their value and help their clients reconstruct their retirements with holistic and comprehensive plans that balance personal goals with the financial capacity to achieve them.
Reframe the retirement conversation. According to a study by Mackenzie Investments conducted in 2021, 71% of Canadians said they don’t know what to expect when they retire. To ease this uncertainty, advisors can help their clients by talking about more than just investment portfolios and help them understand what will give them purpose and meaning as they transition to the next phase of their lives. This sets the stage for a discussion and evaluation of matching needs and wants with financial capacity.
Re-evaluate the retirement income stream. The same research showed that 66% of Canadians are not confident in their retirement income sources. They want to know if they are going to be OK. How much money will they need to save, how long will it last and how much can they earn? By analyzing various income drawdown strategies, such as government and employer-sponsored pensions, registered/non-registered investments and corporate assets, advisors can demonstrate the value of advice through the optimization of after-tax income and/or maximizing net estate value.
Rethink retirement tax planning. Taxes may be the single largest expense during retirement. However, our research showed that the majority of Canadians are not confident about managing taxes when retired. There are numerous options available to retirees to help manage their tax bill. These range from income splitting, spousal loans and the use of family trusts. The order of asset withdrawal in the decumulation phase can also have significant tax implications. Depending on individual circumstances, it may be advantageous to draw from registered assets first and defer drawing from government programs such as CPP, QPP and OAS.
Re-examine retirement estate and legacy planning. Canadians approaching or entering retirement need to have a plan in place for their estates. Advisors can use this as an opportunity to help them with tax-efficient legacy planning and charitable giving, as well as succession planning for small-business owners and professional corporations. Establishing trusts, for example, can be a powerful tool in achieving many tax and estate objectives, such as the control and protection of minors, income splitting, confidentiality, probate tax minimization, charitable giving and more.
For business owners, an estate plan could also include transferring a private company’s ownership and leaving certain assets to charities for more flexibility in claiming donation tax credits to offset owed taxes.
Reconstruct the retirement income portfolio. New retirement realities mean Canadians need to reconstruct their portfolios; yet, over two-thirds of Canadians are focused primarily on the preservation of capital. Capital preservation is important, but a retiree’s portfolio must also provide growth and income as well as stability. Key risks that retirees face in their portfolios include the sequence of returns, longevity and inflation. A well-structured portfolio that is diversified by asset class, region and investment style can go a long way to mitigating these risks.
The retirement phase is not just a life stage for Canadians to explore new interests and pursuits; it’s also an ideal opportunity for advisors to expand their businesses through demonstrating the value of advice and offering both pre-retirees and retirees comprehensive retirement plans that consider all aspects of this exciting period.
At the end of the day, Canadians want to retire from work, not life.
Ron Hanson is senior vice-president, investment strategy and portfolio solutions, with Mackenzie Investments.