Focusing your practice on income planning

Income planning has long been regarded as the dull cousin of accumulation. The ups and downs of the markets are always the talk of mainstream media, while people scratch their heads when the discussion changes to GICs or annuities.

“Income planning is just not something that has captured the imagination of the public,” explains Michael Berton, a registered financial planner with Assante Financial Management in Vancouver. “It’s not seen as very interesting compared to making money in the stock market.”

Until now. Retiring or soon-to-be-retiring boomers want to concentrate on preserving their assets. And shell-shocked by the fallen global indices, those clients who initially pooh poohed annuities, GICs and other guaranteed products now want to know more about what proper income planning entails.

But what’s involved with focusing your practice on retirement income planning? Some advisors believe it’s simply a matter of converting a RRSP into a RRIF or annuity, or moving soon-to-be-retired clients into a guaranteed minimum withdrawal benefit product. But those who specialize in income planning say true retirement draw-down planning goes way beyond that.

“There is a ton of work that has to go into getting [income solutions] set up properly,” notes Daryl Diamond, president of Diamond Retirement Planning Ltd. in Winnipeg. With his wife, Karen, Diamond has focused exclusively on retirement income planning for clients since 1993. “It’s planning and process driven, not product driven. It’s about taking what somebody has accumulated and dissembling those assets, benefits and entitlements and helping them to use these things in the most tax-effective manner.”

That means looking at everything from the Canada Pension Plan, Old Age Security, clawback rates, the client’s company pension (if applicable), registered and non-registered assets and so on. From all of that, you’ll need to figure out where their retirement income is going to come from. Another piece of information you’ll need: Is the client’s retirement goal to ultimately deplete his portfolio or to leave an estate for heirs?

Diamond says that it’s the year-by-year strategies that are critical in this market. “What are we going to do this year because how many things have changed?” he says. “That could be starting Canada Pension Plan or OAS. Or, their objectives and state of their health change.”

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• Seeking security in retirement • Assessing guarantees • Income planning case studies • Keep more money by tax planning • Focusing practice on income planning

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Berton also notes that today’s retirees are in different stages of retirement, creating different income challenges. Someone in an early active retirement phase — a person who has just retired and is interested in frequent travel — may require more income upfront than someone in a passive retirement phase — a person who’s over age 85, has health problems and rarely leaves the house anymore.

“We need to make sure when they take income out that’s it’s not going to further damage their portfolios,” says Berton. “If we’ve been doing our jobs, there should be a certain amount of money in fixed income that’s not so damaged that they can’t draw from it to start.”

This is why Ian Secord ensures that his retired clients have two to three years of the expected income requirements held in GICs or cash accounts. That way, for clients who don’t have a pension and rely on their RRSPs or portfolios for income, they will have some money to access “without having to sell assets in the weakness of the market,” says the registered financial planner at Assante Wealth Management in Calgary. “We try to stay one step ahead by identifying what income they will need the following year and where we expect to draw that income from.”

Guaranteed income, however, does not mean eliminating a growth component, Secord notes. “Inflation is going to be a growing concern for the next two or three years,” he says. “That could be more devastating to portfolios than the current market situation. If we were to experience say 10% inflation, the fixed income side of the portfolio is going to bear the brunt, plus clients will be forced to have to redeem more aggressively from their portfolios just to maintain the status quo.”

How do you make money on a practice that is focused on drawing down versus accumulating? First, consider your fee structure. Berton and Diamond charge fees for their financial plans. Berton notes that if your business is commission based, income planning solutions could be a revenue problem. “Some of these things don’t pay high advisor trailers. If you move people to 80% GICs, you’re not going to make as much money as before and it’s more manual work, so [without fees], you’re going to be working harder for less.”

While the majority of Diamond’s clients are withdrawing income, he still has a strategy for bringing new clients on to stabilize revenue. “We bring clients on of a good net worth and a good amount of investable assets,” he says.

(04/06/09)