Boomer retirement plans being tested

As boomers head down the home stretch in retirement, they do so with a depleted portfolio. Once again, this is forcing advisors to rethink how boomers’ retirement will be different from preceding generations.

One suggestion being put out by RBC Royal Bank is for advisors to consider altering their clients’ financial plans in the five years leading to retirement to account for a transition period leading up to their retirement. In fact, a new survey by the bank suggests that boomer clients are already doing this — although maybe they don’t need to.

According to a survey of more than 1,000 Canadians, roughly half of whom identify themselves as boomers, the market downturn has led boomers to reassess their spending and saving habits to better prepare for their impending retirement. Most notably, they are focused on paying down debt.

The number of boomers who say reducing debt is a top financial priority has doubled in the past six months to 62%. In addition, 50% of boomers say their retirement plans have changed as a result of the current economy. One in four (26%) says they may have to work longer than they expected. One in five believes they may not be able to live the lifestyle they thought they would in retirement.

RBC has launched a new initiative that aims to help clients test their assumptions. The company has launched Your Future by Design: The Learning Series, Retirement Transition, a 75-minute hands-on workshop hosted by RBC’s investment & and retirement planners, to help boomers prepare both before and throughout their retirement.

According to Lee Anne Davies, head of retirement strategies for RBC Royal Bank, the program addresses a crucial issue with boomer retirement, which is, many boomers don’t actually know what to expect in retirement. Davies is suggesting that boomer clients consider transitioning their financial spending and planning leading up to retirement to get a sense of what retirement will actually be like.

“Retirement is going to be very real for them. Right now it is kind of the dream. At some point it’s going to be true. That changes your thinking when it’s real,” she says. “We want boomer clients to use the five years as key years leading up to retirement as a transition period. It’s not like you’re getting to the finish line and you’re done. That’s not going to help your planning.”

According to Davies, boomers face a unique set of challenges that their predecessors didn’t. For starters, they have lived a much more active and luxurious lifestyle than their predecessors. And they are expected to live longer than preceding generations, so their money has to last.

In addition, many boomer families will have the added complexity of likely being simultaneous caregivers for both their adult children and parents who are also living longer, Davies says.

Retirement planning for boomers is sort of a hodgepodge of individual forecasting of what boomers may expect to pay in retirement and learning lessons from preceding retirees.

“If you’re drawing down more money at the beginning of retirement, it may not last you through retirement,” she says. “There are some things you anticipate doing in retirement like winterizing the cottage or buying a new car. Advisors need to ask why are you waiting until your retirement to do this. Why not start doing this now? Why have you chosen your retirement date? Does that make sense for potentially living 30 years into retirement?”

Davies says a transitional plan, in which boomer clients start accounting for these expected expenses using a pool of income they expect to earn in retirement, could be instructive for understanding retirement.

The boomer lifestyle in retirement

According to Peter Drake, the firm’s vice-president of retirement and economic research at Fidelity Investments, there is hard data to suggest that boomer retirees will need to replace a large portion of their income.

Drake says the importance of planning is to identify what the client wants in retirement and create a plan that attempts to achieve those goals. Ultimately, there is no rule of thumb for how much money is needed in retirement.

“Certainly you can provide guidelines, which is what we do, and say, ‘If you want to maintain your consumption, this is what you’re going to have to do in terms of pre-retirement income,'” he says.

Generally speaking, if you maintain the same consumption patterns in retirement, boomers will likely have to look at replacing somewhere in the vicinity of 70% to 80% of their pre-retirement income.

“The question is, are retirees downsizing their expenditures or are they spending even more? Certainly there is evidence at the higher income end that retirees are spending as much in retirement now as they did before,” Drake says. “The other piece of evidence is — and it was done by Statistics Canada — an increasing proportion of people are replacing 80% of their pre-retirement income. We found that number really fascinating when it came out, because traditionally, the advice of the financial community was replacing 70% of that.”

Some may balk at that statistic as difficult to attain, but Drake also points out that many retirees are choosing to work well beyond traditional retirement dates, and the number of semi-retired and post-retirement age workers is expected to increase.

“The traditional view is you need 75% of what you currently earn to replace if you want to maintain your current consumption standards. A number of people are doing it. Many are doing it by working in retirement,” he says. “Demographic changes will last longer than this current upturn in unemployment. The boomers will think about working in retirement. The traditional way of thinking has been to work for 30 to 40 years at ABC Widget Company and look to retire for some leisure.”

He adds, “That view is changing, and the boomers are in the middle of this. It’s partly money, but it’s not all money. It’s the discovery by a generation that is used to being active and, generally speaking, pretty healthy, and they’ll want something to do.”

Davies, who is a gerontologist, does point out that boomers do need to come to grips with the reality of aging. Eventually, mobility and health concerns become an issue that they have to account for. Davies says many pre-retirees underestimate the importance of relationships in retirement. There is a heavier reliance on important people such as financial advisors, family members and healthcare professionals.

“I think the thing I see most often with people planning for retirement is they may be underestimating how important their personal relationships will become,” she says. “I see retirees who will choose to move from the city to rural communities or smaller towns; we see them needing to come back because they need access to those important relationships. You’ve got to be able to think long term and be able to modify a plan in the future should some of those issues arise.”

(04/13/09)