Preparing clients to be financially secure in their sunset years requires three basic steps
As the Canadian population turns increasingly grey, it’s becoming increasingly important for financial advisors to help their clients become financially secure in retirement. There are various possible ways for people to address the problem, such as increased RRSP contributions or considering a longer working life.
But those are not complete solutions. For true financial security, clients and advisors need to work together on a retirement plan — and one investment firm recommends a simple framework to follow.
According to Colleen Jaconetti, senior retirement strategist in Vanguard Investment Strategy Group, setting and prioritizing goals is the first important step. She separated retirement goals into four broad categories:
The next step is to evaluate risks that could stand in the way of clients achieving financial goals. In particular, she listed risks related to the markets, health, longevity, unexpected events, and changes in tax and government policies.
“It's important to understand a person's sensitivity to each risk,” she said. “For example, if a portfolio is aggressively invested in equities, it's exposed to more market risk than one that is invested heavily in bonds. However, an overly conservative bond-heavy portfolio might increase the investor's longevity risk.”
The implications arising of the investor’s risk tolerance should also be considered. In particular, the client’s ability to deal with the worst-case scenario from all the risks they face using their available resources should be assessed. Performing financial stress tests could be useful in this case.
Finally, identify financial resources that can help achieve goals and mitigate risks. Retirement resources include assets like stocks, bonds, and cash; income sources such as one’s salary, pension, rental income, or trust income; and other financial products such as annuities and insurance.
Jaconetti identified three broad categories of retirement resources: guaranteed income, liquid investments, and additional resources such as rental income or real estate.
“In many cases, using one resource to mitigate a risk may actually increase a different risk,” she said. “A sound retirement plan balances the benefits and trade-offs of the investor's lifestyle choices while staying focused on achieving the highest-priority goals.”
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But those are not complete solutions. For true financial security, clients and advisors need to work together on a retirement plan — and one investment firm recommends a simple framework to follow.
According to Colleen Jaconetti, senior retirement strategist in Vanguard Investment Strategy Group, setting and prioritizing goals is the first important step. She separated retirement goals into four broad categories:
- Basic living expenses – food, clothing, recurring healthcare expenses
- Contingency reserves – home repairs, unanticipated healthcare expenses
- Discretionary spending – holiday travel, dining out, leisure activities
- Legacy – bequests and charity
The next step is to evaluate risks that could stand in the way of clients achieving financial goals. In particular, she listed risks related to the markets, health, longevity, unexpected events, and changes in tax and government policies.
“It's important to understand a person's sensitivity to each risk,” she said. “For example, if a portfolio is aggressively invested in equities, it's exposed to more market risk than one that is invested heavily in bonds. However, an overly conservative bond-heavy portfolio might increase the investor's longevity risk.”
The implications arising of the investor’s risk tolerance should also be considered. In particular, the client’s ability to deal with the worst-case scenario from all the risks they face using their available resources should be assessed. Performing financial stress tests could be useful in this case.
Finally, identify financial resources that can help achieve goals and mitigate risks. Retirement resources include assets like stocks, bonds, and cash; income sources such as one’s salary, pension, rental income, or trust income; and other financial products such as annuities and insurance.
Jaconetti identified three broad categories of retirement resources: guaranteed income, liquid investments, and additional resources such as rental income or real estate.
“In many cases, using one resource to mitigate a risk may actually increase a different risk,” she said. “A sound retirement plan balances the benefits and trade-offs of the investor's lifestyle choices while staying focused on achieving the highest-priority goals.”
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