Fewer Canadians can count on large defined-benefit pensions or fat nest eggs
The Investment Industry Association of Canada (IIAC) issued a report on March 18, 2014 titled “Canada’s Investment Industry: Protecting Senior Investors.” The report noted the challenge of defining who is a senior. Rather than picking a specific age, the IIAC used the term “senior investor” to include people who have retired or are nearing retirement. The report also noted that there is only a limited number of Canadians who are not concerned about investment performance. As time goes on, fewer Canadians will be able to retire with a large defined benefit pension plan or significant financial assets.
Most Canadians who are retired, or are approaching retirement today, need to appropriately manage their investments. Investment performance is composed of two parts, the changes in the value of the investments and also the income stream. More and more people are looking for investments that generate an income.
The 2011 Census noted that almost 15 per cent of the population was 65 or older. The first wave of baby boomers, born between 1947 and 1966, began hitting 65 in 2012. The report noted that demographic studies indicate that one in four Canadians will be 65 or older by the year 2036.
Seniors are living longer in retirement than ever before. If a client retires at age 60 and lives to age 90 then their retirement time horizon is thirty years. For most retired clients, it is a daunting task to try to map out an investment strategy to last the remainder of their lifetime. Most seniors want to retire and not get bogged down by looking at their investments all the time.
I have a few suggestions for seniors approaching retirement or those already retired. First, find a qualified financial advisor who you feel has experience, but also one that you can work with for a reasonable period of time. Together you can work on the suggestions below.
The first step I take with new clients is ensuring that I understand their complete financial situation. I suggest that a net-worth statement be prepared, listing all of your assets and liabilities. The more detail you can provide, the better. As an example, if you have certain assets listed, adding in the original cost of those assets helps an advisor map out the tax component for any future dispositions. If you have a previously prepared financial plan, this is an excellent document to provide to your advisor. Often, I see people bring in their previous financial plan, it is not so much a financial plan as a simple illustration or concept.
A very important step is the preparation of a budget. The best budgets are those that are prepared on a monthly basis. Listing all of your incomes (i.e. Old Age Security, Canada Pension Plan, etc.) and all of your expenses will give you an idea of the monthly excess or shortfall.
It is at this stage that an advisor can be invaluable for mapping out and explaining the various options. Many seniors are looking for income. In years past, income was closely associated with fixed-income investments (i.e. bonds, GICs). As interest rates have declined, so has the income level for seniors relying on traditional fixed-income options. It is still possible to create a good income portfolio but this often involves looking beyond traditional fixed income, at least for a portion of the investments.
An advisor should be able to map out the various types of investments that pay income. With each type of investment your advisor can explain the tax characteristics of the payments, frequency of payments, and risks.
Creating a diversified income flow often involves using a variety of investments. An income investor could have GICs, corporate bonds, debentures, bond ETFs, preferred shares, blue chip common shares, etc. Many forms of income are tax efficient, including both preferred and common stocks that generate dividend income. Many preferred and common shares have dividend yields that are higher than GICs and investment grade bonds.
There is no low risk option that generates high income. I frequently explain to clients that you can enhance your potential return by taking a little risk; however, the element of risk still exists. Knowing that risk also exists in fixed income, and that life expectancies are longer, many seniors have opted to adjust their asset mix to include other investment opportunities that generate income within their portfolio.
Historically, a senior could take a very passive fixed-income approach in retirement. Today, seniors have to be more involved in their investments. It is important for seniors to work with a financial advisor to design a portfolio that matches their risk tolerance and investment objectives, such as income and capital preservation.