Retirement calls for a budget

Retirement age Canadians may have more ways to fortify their future than they realize. Although their portfolios may have been undermined by the “Black Swan” events of the 2008 market shakeup, a thorough budget review and a sharp pencil can significantly improve their outlook.

Patricia Lovett-Reid, senior vice-president with TD Waterhouse Canada, tells clients to start by digging through their collection of assets and assessing costs and benefits.

“The asset accumulation phase of life seems almost easy by comparison,” says Lovett-Reid. “Drawing down on those assets is really tough for a lot people. Figuring out if they have enough is a question that can only be answered by going through their financials line by line.”

Require or Desire

“I tell them it is ‘require’ not ‘desire’,” Lovett-Reid adds.

“Even if they were a decade out from retirement, people have had a huge wake-up call over the last 2 years,” says Lovett-Reid. “They’re looking in the review mirror and thinking they got through this relatively unscathed but they’re still down 22% to 25% and wondering if this could happen again.”

“People come to me and they have a large beautiful home in Oakville, but the taxes are $20,000 a year,” says Lovett-Reid. “Do they really need a large scale house and the expenses that go with it?”

If they own vacation property or they’re thinking they need to buy a condo some place warm, Lovett-Reid tells them to think again. “For the life of me, I can’t make a vacation property pay. You can rent for a lot less,” she says, “and same with the sailboat.”

Lovett-Reid still recommends a portion of a client’s portfolio be growth focused, but the emphasis is on asset protection through tax efficiencies, stop loss orders and inflation protection strategies.

“I spend a lot time explaining the important difference between GICs and high quality corporate bonds,” says Lovett-Reid.

DIY Pensions

Most retirement or near retirement Canadians want to make sure they don’t outlive their savings. “People used to hedge longevity risks by working at a company that had a pension plan,” says Alexandra Macqueen, CFP. “Well, most jobs don’t come with pensions anymore.”

In their upcoming book, Pensionize Your Nest Egg, set for release in September, authors Alexandra Macqueen and Moshe Milevsky suggest a way to secure assets for retirement. “When you hear anxiety from people about interest rates going up or down, that tells you they are leaving too much money exposed to market risk,” she says.

As people approach that “cash out” phase of life chances their nest egg is at or near peak value. It’s the most money they will ever see in their lives but a ‘Black Swan’ event like the one in 2008 can seriously affect their monthly income in the future.

“If you have left everything in financial markets that don’t have guaranteed returns,” explains Macqueen, “then you are exposed to market risk.”

She suggests dividing assets into three streams.

• A longevity-insured annuity — which could include the Canada Pension Plan
• Stocks
• A guaranteed minimum withdrawal benefit product

Billions of dollars have been flowing into GMWBs since they were first introduced to the Canadian market in 2006. “These products are incredibly fast-moving,” says Macqueen. “They are marketed as ways to have both the benefits of guaranteed income, like annuity, but at the same time, maintain market exposure.”

Unlike an annuity, which disappears when you die, the remainder of the GMWB goes to your estate. The downside is that they come with higher fees.

Punch Above Your Weight

Smart advisors know it is performance that keeps clients coming back, and keeping fees low helps to boost income streams in the future.

“Fees are an issue,” admits Lovett-Reid. “We are challenged on it all the time and I think we should become more transparent so people can evaluate the best deal on the street.”