Saving overshadows spending plan

Despite dire reports of North America’s plummeting savings rate, there is another — potentially greater — danger on the horizon for the aging baby boomer generation: gauging how long those savings will last. For decades, the financial services industry has focused on accumulation of wealth, but as the boomers retire, planners will be forced to change their focus to the orderly drawdown of assets.

“Despite the emphasis on accumulating retirement savings, boomers are not prepared for the challenges of retirement spending,” said Donald Stewart, CEO of Sun Life Financial. “It is not too late for them to raise their game, and it is the responsibility of financial professionals to lead the way.”

For advisors, that could entail a wholesale change in how they plan for the later stages of their client’s life.

“All financial planners need to shift their models from single end-point projections to multi end-point projections,” Stewart said, speaking to a lunchtime audience hosted by the Economic Club of Toronto. “They need to educate themselves and their clients on mortality trends, the latest product innovations, and be ready to offer a wider range of solutions.”

Stewart said people consistently underestimate just how long they will actually live, making longevity risk a greater danger than clients realize.

“Despite the improving mortality phenomenon, financial planners today are likely to ask their clients to choose a target age for planning purposes,” Stewart said. “The risk of outliving your money is very real and can be ignored by conventional planning techniques.”

Even the actuarial community has repeatedly gotten the call wrong, predicting that longevity trends throughout the 19th and 20th centuries would level off. This projection has yet to materialize, as female life expectancy has increased by almost 3 months every year since 1840.

Aside from the shorter life expectancy, the boomers’ parents may have had an easier time planning out their retirement spending because defined benefit pensions were far more common. Stewart points out that living 30 years beyond retirement is not such a problem for those whose pensions promise lifetime income.

Many boomers may still have these plans, but for the generation that follows, DB plans are an almost unheard-of luxury. For those who have any corporate pension at all, it is most often a defined contribution plan.

“While this has many positive features, the path to predictable lifetime income is not as clear as under a defined benefit plan,” Stewart said. He points out that the insurance industry has taken the lead on developing income replacement vehicles, such as the guaranteed minimum withdrawal benefit plans offered by Sun Life and Manulife, but he admits they are not the only path to a worry-free retirement.

“They are only part of a broader set of solutions under development, including longevity insurance, target date investments and auto-pilot defined contribution plans,” he said. “Financial institutions like Sun Life have an obvious interest in helping individuals draw down their retirement assets in an orderly way.

“But it is not our sole responsibility, nor is the life insurance industry capable on its own of addressing the challenges. Others must step up as well to ensure that society is ready for the tidal wave of retiring boomers.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com