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Financial planning tips

June 07, 2017

Don’t rely on yesterday’s retirement strategies

The retirement solutions that worked when interest rates were high and retirement benefits were defined don’t work any more. Here are some that do.

Ed Hailley has some old-fashioned financial advice for Canadians who are planning for the future. It’s served him well over 3 decades of retirement.

“Save as much as you can and spend as little as possible,” says the 86-year-old. His job at Manitoba Hydro allowed him and his wife Catherine to raise 5 children mostly on 1 salary.

It’s a prescription for financial well-being that never grows old. Yet Hailley is also quick to point out that times have changed.

“I was lucky enough to get a good job with a good pension in the 1950s and keep it until I retired,” says the grandfather of 8 and great-grandfather of 3 (soon to be 4). For Hailley, saving what little money he and his wife could was a fairly straightforward proposition.

Guaranteed investment certificates (GICs) were their savings vehicle of choice for retirement.

“We’ve done well keeping it simple, but I don’t know if this formula would work today,” Hailley says.

It’s not your grandpa’s retirement any more

Indeed, planning for retirement is much different now.

Simply put, it’s not your grandpa’s retirement anymore.

“First and foremost, people are living longer,” says Paula MacMillan, a Sun Life Financial advisor in Winnipeg. “A longer life in retirement requires more planning, more money and more attention to the details than ever before.”

Not only is life expectancy much higher today than it used to be, but also in the past many Canadians tended to be loyal to one employer for much of their working lives and to belong to defined-benefit pension plans that guaranteed a steady retirement income for life.

These workplace plans are increasingly rare today, and those still in place are often not nearly as generous as they once were.

GICs — the other mainstay of old-school savers like Ed Hailley — aren’t what they used to be, either.

Today interest rates are at historic lows. Consequently, an all-GIC strategy would likely not be enough to provide a sustainable income over the course of a potential 30-year retirement.

Instead, Canadians will increasingly have to rely on a variety of sources when saving for retirement.

“A fundamental change is that people have more money to deal with, but I don't necessarily mean more actual dollars,” MacMillan says.

Workers retiring today are likely to have multiple registered accounts and non-registered accounts. They often have more than 1 pension plan to draw on — a result of having switched jobs a few times over the course of their working lives, Ms. MacMillan says. “I have had clients with money in 5 different plans from 5 different employers.”

Defined-contribution plans need professional advice

The majority of these are defined-contribution plans that generally require more detailed planning and professional advice prior to and during retirement, she adds.

 “Clients need an advisor they can trust to review all of their assets and explain the myriad of investment options available in the marketplace,” says MacMillan.

Among those options are annuities. These have fallen out of favour in the current low-interest rate environment. Yet retirees have more annuity options than ever before, including individual variable annuities (also known as segregated fund contracts) that can provide guaranteed income for life. The market value of seg fund contracts generally decreases when investors begin to take income, but they also have the potential to increase over time depending on the performance of the underlying investment funds. 

Yet even the traditional annuity that pays a set benefit can play an important role. “We show clients routinely how a small amount of their retirement savings put into an annuity can level out and ensure that their fixed expenses are met with guaranteed income alongside their government benefits,” MacMillan says, adding these investments can effectively serve the role of a defined-benefit pension plan in retirement.

Segregated fund guarantees

Investors can also choose segregated fund contracts that guarantee 75 or 100% of their initial investment at maturity, reduced for withdrawal, while offering exposure to the upside of the market – a chance for their investment to grow.

In addition, ready-made portfolio options offer worry-free simplicity for set-and-forget investors seeking a balanced mix of income, capital protection and wealth accumulation to sustain their financial needs over the course of retirement.

So while the retirement game has changed and the future is anything but certain, one thing is clear: Canadians have more investment selections to choose from than ever to achieve their goals.

It’s just a matter of learning what those choices are, MacMillan says.

“Between the options available to Canadians on how and where to invest and everything else to consider, people need and want help,” she adds. “And the need for good, reliable advice has never been greater.”

Make well-informed decisions with helpful advice. Find an advisor near you.

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