Retirement is longer, increasingly diffuse and more complex, say authors of the most recent edition of the advisory handbook, The Boomers Retire: A guide for financial advisors and their clients. Advisors focused on this kind of planning too, say the practice requires out-of-the-box thinking to address the notably unique and dynamic needs of each individual client.
There are some business practices which can be standard when serving this cohort, but it is worth noting that rules of thumb generally won’t be effective when you get down to the planning – a close look at each client’s circumstances, alongside current market conditions and current tax rules, needs to be taken into consideration when planning for decumulation of wealth over what can be a very lengthy period of changing needs.
“Timing is important in decumulation. The asset class you’re in, the tax shelter, it’s all part of the game,” says certified financial planner (CFP), Vince Olfert of financial advisory firm, Connect Wealth. “The real success, in my opinion, comes from knowing the nuances of how money moves in our system and capitalizing on it in a legal and tax-efficient way.”
Tax changes
Taxation changes, in particular, are a must to keep on top of for those who do this kind of planning. Olfert recommends the annually updated KPMG tax planning guide, Planning for you and your family.
CFP, Jason Heath of fee-only planning firm, Objective Financial Partners adds that a proper understanding of taxation can make a dramatic difference when considering which assets to draw down first and which strategies to put into place to minimizing the overall amount of tax retirees will pay in their lifetime. “A lot of times people think that deferring tax at all costs is the best strategy but that sometimes results in more lifetime tax. Sometimes it actually makes sense to pay tax on purpose in retirement. It can lead to better decumulation planning but also to a larger estate.”
Similarly, although many simply apply when the forms arrive in the mail, there are significant decision-making opportunities clients also have when it comes to choosing when to take their government pensions.
“There is a 10-year window when you can start your CPP and a five-year window for your OAS,” he adds, referring to the Canada Pension Plan (CPP) and Old Age Security (OAS). “It can make a big difference in terms of the tax you pay and in terms of the amount of pension you receive depending upon when you elect to start your pensions.”
Team approach
In addition to needing up-to-date knowledge about these pensions, about tax changes and about market conditions, advisors also need the ability to work well with others on a number of fronts to serve retired clients well.
“In my opinion, the financial world is getting too complex for advisors to be working on their own. We need others to help us do our best for clients.” - Vince Olfert
Some professionals that advisors will likely need to consult with can include a client’s investment advisor, insurance advisors, estate lawyers and accountants, for example. Olfert also points out that many will also benefit from consulting about the client’s needs with other advisors, as well.
“You sometimes need a group of advisors (to brainstorm with) to get the best solution for the client,” he says, discussing the benefits of having advisory team members to bounce ideas off of. “In my opinion, the financial world is getting too complex for advisors to be working on their own. We need others to help us do our best for clients.”
Put aside preconceived notions
CanAge CEO, Laura Tamblyn Watts also agrees that advisors need quality soft skills as well – both to effectively serve older clients and meet their needs, but also to get at their unique circumstances in the first place. In particular, she encourages advisors to put aside their preconceived notions, stereotypes about age and stage, and put aside checklist tick boxes, to instead find out what clients really want and need. “It’s not linear,” she says.
“We are good at thinking about things like getting married and your needs around that, getting divorced and your needs around that. Even planning for death and your needs around that. But then we have this idea of retirement which is really not very evidence-based and is really not in step with what many people are actually looking for.”
She also cautions advisors in their decumulation planning to be very clear about who they’re serving and what services they’re providing, exactly – although estate planning and decumulation planning are related, they are not the same thing. “People do not even know who their client is, often mistaking the family is the client or the adult child is the client, really not keeping clear what their ethical and professional obligations are.”
Psychological challenges
Finally, in addition to managing all of the relationships, the strategies and the technical details, shifting to offer decumulation planning can also bring with it some new psychological challenges advisors may not have encountered as often in the past.
CFP Alexandra Macqueen and CFP David Field, authors of the previously mentioned book, The Boomers Retire, point out that the nature of decumulation today can be a source of stress for clients, as many will look at sources of income in isolation. “Your client needs to be reminded that the employer pension (for example) is only one of many potential sources of income to be considered. Government benefits, in particular, often make a greater contribution than many clients expect,” they write.
“Modest levels of income from pensions and government benefits can supplement earnings from part-time, contract or consulting work, as well as regular withdrawals from an investment portfolio. Tax planning too, can help ensure that more of our retirement income is available to spend. The challenge for the new retiree is in blending together income from the government, former employers and personal resources in the most effective way possible.”
