In some cases, new retirees risk running short on cash by having too much of their retirement savings in rental properties, says one advisor.Andrii Zastrozhnov/AFP/Getty Images
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
More than 90 per cent of Canadians with a written financial plan say they feel financially prepared for retirement, according to the recent 2023 Fidelity Retirement Report. Yet, only 85 per cent report being emotionally prepared for it.
The findings suggest all the planning in the world cannot prepare retirees for the mental shock of retirement.
“What they have in their heads might not relate to reality,” says David Driscoll, president and chief executive officer at Liberty International Investment Management in Toronto.
Based on his 25 years advising clients, he says the dramatic shift from working and saving to spending and – whatever – leaves many reeling.
“The first year is one of transition. It’s usually the most difficult because you have to find activities that give your life purpose,” he says. “You can only golf so much.”
Globe Advisor spoke with three veteran financial advisors about the top surprises – good and bad – that many new retirees face when they embark on this new phase of life.
Immature investment strategies
Even when it comes to portfolio management, Mr. Driscoll says many new retirees have trouble coming to terms with the need to invest more conservatively to ensure their savings are secure.
“They have to be focused on income and capital preservation, not chasing cannabis, bitcoin or artificial intelligence,” he says. “The last thing they need is to see is a gigantic loss in their portfolio.”
In some cases, new retirees risk running short on cash by having too much of their retirement savings in rental properties, he adds.
“It’s fine to own real estate income properties in your 20s, 30s and 40s, but when you get into your 50s and 60s, it’s not like you can pull a brick out of your condo rental and eat it to live,” Mr. Driscoll says.
One of the bigger mistakes he has seen from new retirees with significant nest eggs is being too generous early in their retirement and giving money to their children.
“People are living into their 90s,” he says. “You can’t afford to give money to your kids because you’re going to need it for yourself.”
The fear of outliving savings
Winnie Go, portfolio manager and senior wealth advisor with Go Financial at Scotia Wealth Management in Toronto, has seen the opposite in her almost 30 years in the business – clients who are afraid to spend fearing they will run out of money.
“The first big mental block when they retire is getting past the notion, and the safety and comfort, of not having a paycheque,” she says.
“They don’t know what to spend their money on, or they have more than they think they do.”
Her advice to avoid the shock of retirement is to formulate a written retirement plan at least 10 years before the targeted retirement date with a life expectancy of 95 years and revisit the plan every three to five years.
“They can plan as often as they like with the assumption that they can see if their money is going to run out or if they’re going to have a lot more,” Ms. Go says.
While some retirees are too frugal with their money, she says many overlook basic cost-saving measures such as tax planning, which can be beyond the scope of an advisor and requires a specialist.
“When you do a full financial plan, you talk about where they are today, where they want to be tomorrow, and the eventuality of the tax and estate planning consequences down the road,” Ms. Go says.
But it’s the estate planning part that takes the largest number of new retirees by surprise because it inevitably leads to uncomfortable discussions about life expectancy and death, she says.
At a time when retirees are thinking about a new life, she says many neglect making provisions for a power of attorney if they’re no longer able to make their own decisions and wills for when they die.
“These conversations are morbid, but they’re very important to have,” she says. “We’re all going to die sometime but we don’t know when, so we have to plan for it.”
Seeking a balanced retirement
Barry Schwartz, executive vice president, chief investment officer and advisor for 23 years at Baskin Wealth Management in Toronto, says he finds the desire to spend in retirement is often offset by the fear of running out of money.
“There’s a counterbalance,” he says, adding that clients often attempt to create a psychological cushion by keeping more of their portfolios in safe investments and cash.
“You have to have as much cash and safety in your portfolio to allow you to sleep at night and live a mentally healthy life,” he says.
Yet, Mr. Schwartz cautions new retirees can be too safe and sacrifice the growth needed for later in retirement.
“Just having that one year’s worth of cash out of the market is psychologically very important for people, but I think some people overdo it,” he says.
The Fidelity Retirement Report suggests he may be right – and it’s getting worse. Half of Canadians surveyed reported they’re only investing in safe, low-return assets. That’s higher than the 40 per cent who reported investing in only safe assets in 2022.
“Don’t get conservative too soon, especially women, who live longer than men,” he says.
Mr. Schwartz says a lot of anxiety for new retirees also comes from more mundane changes relating to the maze of regulatory and tax requirements.
“You retire and start getting [registered retirement income fund] payments, [Canada Pension Plan] and other pension income and the [Canada Revenue Agency] comes after you with instalment plans, which makes people nervous,” he says.
“When you were working, you didn’t think about taxes because it was taken off at the source.”
At the opposite end of the psychological spectrum, he says some new retirees spend their new-found freedom burning through their savings.
“We’ve had conversations with clients about spending too much money,” he says. “For those people, it still doesn’t get through.”
For more from Globe Advisor, visit our homepage.