Before exiting the workforce, it’s time to revisit retirement income, sources, and needs versus wants.Getty Images
About 900,000 Canadians are set to exit the workforce before 2026, according to a report last year from TD Economics. As the ‘pre-retiree’ cohort prepares for this next phase, one of its biggest challenges is getting the right advice.
Annual survey data published earlier this year by FP Canada, a financial planning non-profit, suggested that only about one-third of Canadians readying for retirement are working with a wealth professional.
“That’s concerning,” says Tanya Wilson, senior wealth adviser and portfolio manager at Gold Seal Financial Group in Kelowna. B.C., part of Wellington-Altus Private Wealth. “It means many people are saving blindly, and they actually have no idea whether they are successfully working toward achieving those pre-retirement goals.”
Even pre-retirees who’ve accumulated sufficient assets may not yet have fully figured out lifestyle and retirement budgets, what percentage of a portfolio can stay in more of a growth strategy or what percentage can be built as a legacy portfolio to be passed down, Ms. Wilson says.
For those who saved diligently, there’s still time to get a clear picture, says Carissa Lucreziano, vice-president for financial planning and advice at CIBC in Toronto. Start with needs versus wants.
“The pre-retirement phase is a good time to revisit income requirements and sources. Get to know how much you require for essential expenses and savings, and then how much more you desire. What you require and what you desire are two different things,” Ms. Lucreziano says.
Financial strategies can be tailored to retirement stages. Many pre-retirees build a cash wedge into their portfolio, designed to meet the immediate financial needs of the first years of retirement with cash-ready sources of money. The rest of their savings can remain invested in vehicles designed to grow capital that will support them later on.
“We love cash wedge strategies,” Ms. Wilson says. “If you can have a few years of your required income in a safe and secure type of cash wedge, people are more willing to look at the rest of their wealth in a more growth-oriented way that will keep up with inflation. I’ve always said inflation is the most overlooked threat facing retirees because purchasing power will erode.”
A GIC ‘ladder’ is one example of a cash wedge, where savings are invested in short-term government bonds, such as six month, one year, two year, or three year. That produces some interest income with a staggered (or laddered) maturity schedule, and protects the earmarked money from market volatility.
Still, for pre-retirees it makes little sense to shift all or even the majority of growth assets into low-risk options such as GICs. “The GIC interest rate is never going to beat inflation. When you look at it on an after-tax basis, we’ve never seen an extended period of time where interest rates on GICs kept up,” Ms. Wilson says.
Another part of pre-retirement planning is considering what an employer can do to maximize pension contributions or extend benefits. Many workplaces offer benefits continuation plans that can be started in the run-up to retirement, or offer extendable insurance policies. There may also be ‘phase out’ options, where the workload and compensation are wound down over a fixed period.
Ms. Lucreziano recommends trying to maximize registered accounts in the run-up to retirement, taking advantage of any contribution room available. “One thing that could put a damper on accelerated savings is outstanding debt, whether that’s a mortgage or line of credit,” she notes.
That’s why it’s crucial to establish a financial plan well before the pre-retirement years. “Markets will do their thing and be up and down, but having sound financial habits from the beginning means you don’t have to be struggling and flustered later on,” Ms. Wilson says.
A lack of savings is the most basic roadblock to reaching retirement objectives. Recent data from HOOPP (Healthcare of Ontario Pension Plan) indicates that three-quarters of Canadians aged 55 to 64 have $100,000 or less saved for their post-working lives. That likely means delaying retirement, immediately scaling back spending and kickstarting savings if possible, Ms. Wilson says.
“The first thing is to get an actual accurate picture about precisely how underfunded the retirement might be. It would be nice to be able to get in time machine and go back in time, but we can’t do that. So at that point, it’s really important to manage expectations.”
Editor’s note: This article has been updated to correct Tanya Wilson's title; she is senior wealth advisor and portfolio manager.