Drawing down

If you’re wondering what’s in the retirement market for you as a financial advisor, the answer is: Plenty.

A lot of advisors balk at the idea of serving retiring Canadians. They say things like, “Why would I want to focus on a market where the assets aren’t growing? There is no more money for clients to add once the income streams are established and my book would actually be shrinking.”

Those arguments miss the point. The retirement income market is attractive for many reasons. First, the vast majority of investable assets held by Canadians are in the hands of people over age 55, and that baby boomer generation is nearing retirement. Further, the number of Canadians turning age 60 will increase annually for the next 20 years, so the average amount of investable assets that comes with acquiring a new retiring client is quite large when compared with accumulation clients.

In addition to helping your existing clients make the retirement transition, your practice should focus on taking accumulated assets away from other advisors and institutions. According to a study released last spring by the U.S. insurance association LIMRA, 84% of boomers over age 50 didn’t have a formal plan for converting accumulated assets into income at that time. The survey also found 68% of current retirees lacked similar planning. Assuming Canadian statistics reflect the same trends, there’s a huge potential market for advisors who know how to help clients manage such transitions.

Why do so many people who are headed toward retirement lack plans? Largely because most advisors don’t emphasize that aspect of the relationship; they’re too focused on the accumulation phase of an investor’s life. It’s this lack of focus that makes the segment such an incredible business-building opportunity for those willing to specialize. And, no, simply converting RRSP assets to a RRIF account is not retirement income planning.

Many investment realities distinguish the accumulation years from the investment years. Saving for retirement takes place over a long period, which means clients are better able to deal with market downturns. With clients in their prime earning years, advisors are able to explain volatility will average out over time, and in many cases can take advantage of down years to accumulate stocks that would otherwise be too expensive.

Those same clients become more reactive, however, when income is being drawn from their assets, because negative investment returns represent a further reduction in the value of the holdings being used to both live and to create additional income. If clients experience this “double drawdown” effect, it may become impossible to sustain the capital value of the income-producing assets, or to continue drawing income at the same level.

During the accumulation years, if assets don’t perform or capital is eroded through negative returns, retirement dates can be pushed back or additional savings can be added to the investment mix. Working with an income scenario forces us to address the investment portfolio with more diligence, and on a more frequent basis.

The delivery of income from integrated sources not only requires the best mix from a tax perspective, but also requires advisors to be selective in terms of which investments are being used to create new income.

Creating enough after-tax income for retirees requires combining fully taxable, tax-favoured and non-taxable sources of income. The advisor’s objective is to do this in a manner that puts the least amount of strain on the income-producing assets. For example, in Ontario, to create $1 after tax in the lowest tax bracket requires a withdrawal from a fully taxable source of $1.28.

Once we move into the middle bracket, the required withdrawal jumps to $1.45. That’s an increase in tax of 60% to create the next after-tax dollar to spend. To create the same $1 after tax in the middle bracket from dividend income or realized capital gains would require withdrawals of $1.19 and $1.18 respectively. So another critical service provided by the advisor in the disbursement market involves putting together the various income sources with a view to achieving optimum tax-efficiency and capital preservation.

People don’t just retire at 58, live well and healthy, and then keel over at 93. There is a series of stages retired people progress through and most of the changes involve health, not only of the retiree but also of his or her spouse. During the accumulation years, when talking about their plans for retirement, clients tend to make generalized statements about stopping work at age 60 with $4,000 of net income per month. But when those same people are about to retire, we don’t have to guess — the client can tell us exactly how much income he or she will need each month. However, there are no guarantees about how long a client or spouse will remain healthy. Without specific time parameters, advisors need to address the balance between helping clients use their assets to enjoy their healthiest years, while still protecting against a scenario whereby they outlive their income.

We also need to address the inevitability of declining health, even though we don’t know exactly when these changes will occur. As part of overall planning, we must promote the use of wills and healthcare directives, and encourage clients to investigate the use of trusts where appropriate. From an income perspective, we need to educate clients about term-certain and life annuities to address extended longevity.

Discussions of critical illness coverage and long-term care coverage need to be included as tax-efficient and cost-efficient solutions to the loss of health. And make sure you don’t ignore the need to use insurance that covers health and care costs, because it’s key to preserving income-producing assets. From an estate perspective, the use of life insurance can create capital for a surviving spouse, deliver an inheritance to future generations, cover estate taxes or provide charitable bequests.

The other part of this reality is that many boomers, during their own retirement years, also have to look after a parent or parents. The coming years will see two generations that will be retired simultaneously in greater numbers than ever before. This will produce substantial intergenerational planning opportunities.

For example, consider the use of long-term care insurance to take the burden off children who reside near their parents (assuming at least one child does). How would funding the care of parents affect inheritances to their retiring children, or worse, encroach on income-producing assets for those children? Is there a need for life insurance to preserve estate values, pay taxes, equalize bequests or fund charitable giving? Each of these needs to be reviewed with soon-to-retire clients.

The retirement income market is a different art and science from the accumulation market. And there are many ways advisors with specialized knowledge in the retirement income market can take an existing income scenario and show clients how to make things better. If your clients feel they will be better served by an advisor who can illustrate the ability to deliver superior results and value during the retirement phase, they will move their business over. You can’t dabble in this area; you need to focus on it. Unless you’re content to hold the door while your clients walk out.

Daryl Diamond, CFP, CLU, Ch.F.C., is president of Diamond Retirement Planning Ltd. in Winnipeg.