Unforeseen events may present retirement challenges for baby boomers
The time-honored retirement strategies planers have historically used are now being radically reshaped by high levels of debt, new investment rules, historically low interest rates, volatile markets, taxes and the growing concern of a housing market bubble. This means for those of us nearing or now in retirement, it’s becoming exceedingly challenging to find a planning strategy to cover all these issues.
For these reasons, the importance of seeking the advice of a financial advisor will assume greater importance than ever before.
There’s a firestorm of forces conspiring to derail boomers’ retirement planning efforts, strategies which bring investing in life insurance products, long underrated and often maligned components of retirement planning, back to the forefront. This is especially true considering their tax efficiency compared to a bond portfolio, providing an asset class that clients may need to consider for future tax sheltering purposes.
A financial advisor can help you to be knowledgeable and aware about these new challenges, and the opportunities available and how to use them in your retirement plan. Focus needs to be shifted away from the absolute value of a portfolio to the need to develop stable and predictable income. This conversation won’t be easy, but will have to be made covering some of the following points.
- In a 2011 poll 49% of Canadians with debt said they made at least one extra annual payment to reduce their balance, but very few sought professional advice on how to manage their debt. It seems Canadians are more likely to seek financial advice about saving for retirement than about managing their debt. To achieve significant debt reduction, people need to make extra payments and reduce their interest costs first.
- A financial plan for retirement is only as good as the tax planning around it. Retirement planning is ineffective if it only focuses on finance and not on tax. Tax efficient asset allocation can substantially increase the longevity of a retirement portfolio while allowing for a sustainable withdrawal rate.
- Again, an advisor can add tremendous value by finding the balance point that exists between finance and income tax law. One example is to develop plans that take very tax efficient draws early on in retirement and as little capital out of their accounts as possible.
- Taking less money out of a retirement portfolio means leaving more money growing in it, which is a recipe for longevity. To achieve that, the general rule is that your fixed income investment options should be held in your registered accounts, where as annuities, life insurance and equities should be held in unregistered accounts. It’s generally accepted that a 4% withdrawal rate from a well diversified investment portfolio should be sustainable for life.
When it comes to retirement income, there are three significant risk factors that retirees face:
- Longevity risk: Living too long or outliving your money
- Market risk: The portfolio running out of money prematurely;
- Inflation risk: The inability to maintain purchasing power due to inflation
A properly designed retirement plan must cover all three factors to be considered sustainable.
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