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Meeting the Retirement Challenge Head On

How two advisors are successfully negotiating today’s rapidly changing retirement landscape

According to a Financial Post 2019 report, the Canadian retirement gap – the number of years that seniors might outlive their money – is now ten years for men and thirteen for women. From low yields and increased market volatility to the risk of outliving one’s savings, retirement planning has been forced to evolve significantly over the last decade and a half. Active Matters recently spoke with two advisors to see how they’re adapting to the new retirement reality and how their clients are responding.

Claudia Weisser

B.Comm., FMA, CIM

Senior Financial Advisor Assante Capital Management Ltd. Dorval, Quebec

Originally from Germany, where she started her career as an accountant, advisor Claudia Weisser certainly has a unique perspective on the industry. An advisor since 1997, Claudia originally started in Canada with Investors Group and then moved to Berkshire Securities before joining CI Assante Wealth Management, where she’s been since 2006.

Today, Claudia and her staff of four – which includes her husband, who is an associate advisor – serve roughly 250 households comprised mainly of small business owners, professionals, and entrepreneurs.

When asked about significant changes over the years, Claudia notes that when it comes to retirement, many of her clients today are more fearful about a range of issues.

"What if I have to go to a retirement home? What if I live so long that I can’t stay in my house? Do I have enough money to retire and will it last?” says Claudia, recounting some of her clients’ most persistent fears. Claudia says longevity risk – the fear of running out of money in retirement – is clearly the biggest worry among her clients.

With markets losing ground in 2022, Claudia has been especially proactive, reaching out to clients, urging them to sit tight and not panic. “When markets are down, I think it's all about being there for the client, and to have them avoid making a mistake because that's when they want to get out, or they just want to do anything to feel productive,” Claudia notes.

Claudia’s quick to point out that inactivity can sometimes be a good thing. “As investors, we want to be active when things are going wrong. We want to make changes. We want to react. We want to do something,” Claudia adds. “But this time, doing nothing was usually the best thing to do. There simply haven’t been any good options now.”

Building Financial Plans

While markets have certainly evolved over the last two decades, Claudia says one thing hasn’t changed: the importance of creating financial plans for clients. “It’s the most important thing. Once you do the plan, it identifies any problems, which can then be addressed early on.”

While it often depends on the individual client, Claudia notes that the retirement conversation usually starts a decade before retirement. “The 10-year point is very important because that's when a lot of people start saying, ‘You know what? Let's start planning. Let's see if I'm really okay.’”

The conversation then usually deepens at the five-year point. And when clients are roughly two years away from retirement, depending on the market situation, that's when Claudia starts looking at making some changes – perhaps taking some risk off the table and building in that cash reserve so that clients feel secure.

Claudia says clients worried about market volatility need to have a cash reserve in the portfolio, either for withdrawing, for income needs, or for opportunities – because a drawdown always represents an opportunity to purchase solid companies at a discount.

Negotiating the Challenges

When it comes to building retirement plans, Claudia admits that the low-yield environment has been a challenge over the last few years. “Bonds just haven't done anything, which is starting to get a little bit more interesting as we're going through the cycle of rising interest rates.”

“I think low yields are a big challenge because most use the balanced portfolio to a certain degree. As long as the market is strong, the client isn’t concerned about bond performance because it's going to be compensated for by the stock portion. Usually, a balanced portfolio would absorb a correction like the one we have. But combined with the interest rate increases, there was nowhere to hide. Let’s face it, the balanced portfolio didn't really do its job this year.”

Claudia also acknowledges that the long-term economic effects of the pandemic – inflation, supply chain shortages and rising interest rates – present greater investment challenges than the pandemic itself.

Claudia notes that if the markets stabilize, her first step will probably be picking up some equity to accelerate the rebound. Eventually, once the interest rate increases level off, she’ll look at selling off some equity and buying some bonds to have a nice yield, then basically go back to the balanced portfolio, which should be performing a lot better within the next 12 to 18 months, once the cycle has been finished.

What Clients Can Control

Although market returns in 2022 have been less than ideal, Claudia highlights the fact that clients have an important role to play in improving their own retirement – whether that’s trying to save more during their working years or spending less in retirement.

While no one can guarantee a set rate of return for investors, Claudia says that tax-efficiency is a key component to the retirement plan. “It’s crucial to reduce that tax burden during retirement, so let’s take advantage of tools like spousal RSPs, income-splitting, and tax-free savings accounts when appropriate. These are all things that I can do to improve a client’s bottom line in retirement.”

Claudia says asset allocation is also key. “Sometimes, if your rate of return is not in the right portfolio, let's say you have it in your RSPs, then the taxes are going to eat your excess growth. The return is what a lot of clients focus on, but there are many other things that we can focus on to make a portfolio last.”

Claudia also points out that, in most of her clients' situations, there's usually at least one property that's fully paid off upon retirement, so if all else fails, there is an asset available that could be used as well to extend the retirement cash flow.

This year, Claudia says she’s been busier than ever, reaching out to clients to reassure them. “This is one of my most important roles as an advisor: to stop clients from making mistakes when their emotions are taking over. “We're going to get out of this," she says, “we just have to stay focused on the big picture.”

Darren Farwell

B. Comm., CeFT, CFDS, CIM, FCSI, FMA

Senior Wealth Advisor Portfolio Manager The Farwell Group -

Scotia Wealth Management

While market statistics indicate that crashes and heightened volatility may have increased over the last fifteen years, Scotia Wealth Management Advisor Darren Farwell has dealt with volatility throughout his entire 30-plus-year career.

Soon after starting as an advisor in Toronto with Montreal-based Levesque Beaubien, Farwell was forced to pursue other opportunities after the stock market crash of 1987 eventually forced the company to shutter its Toronto office. In 1988, Farwell moved over to McLeod Young Weir, which subsequently became ScotiaMcLeod and now Scotia Wealth Management.

More than three decades later, Darren is still at Scotia Wealth Management in Toronto, where he leads a team of eleven investment professionals and administrative staff to help guide a client base comprised largely of business owners.

“I've grown up with my clients,” Darren says. “Through the bulk of my career, clients were saving for retirement but then they transitioned from saving for retirement to transitioning to, and living in, retirement.”

Financial Planning: An Essential Element

While his client base has remained fairly constant throughout the years, their needs have changed dramatically. One of the biggest changes is the move toward financial planning. “As my clients are transitioning toward or actually entering retirement, a lot more planning is required. In the '90s, I hardly ever did a plan; now, 90% of my clients have a Total Wealth Plan,” Darren says, adding that they now have a full-time financial planner on the team.

A financial plan isn’t something you do once and then put away on the shelf to gather dust, Darren says. By regularly updating their clients’ financial plan, Darren and his team can get a good sense of whether clients are still on track for a comfortable retirement.

Understanding that an unfortunately timed market drawdown can decimate one’s retirement, Darren performs what he calls an “early warning signal” for clients as they transition into retirement. “We specifically define a three-year period after you start using money from your investments,” Darren says. “We look at where your investible net worth is at the three-year point, and it should not be less than where you started. If it is, we need to do a deep dive to understand why that is.”

The Three-Bucket Approach

Most of Darren’s clientele remains concerned about the risk of outliving their money. “In my experience, the thing that is most challenging is helping clients feel secure that they've got the money that they need to live the lifestyle they want to live through the rest of their lives. That's the big challenge,” he says.

To help meet that challenge, Darren employs what he calls the three-bucket approach to help ensure retirees have enough money to truly last a lifetime. The first bucket highlighted is the “risk-off bucket,” which Darren refers to as “non-market correlated, non-interest-rate correlated, and liquid. You can access it anytime, without having to worry whether markets or interest rates are up or down.”

Darren continues, “The number-one principle you never want to get in trouble with is selling good stuff at a bad time because you need money to pay the monthly bills. The risk-off bucket is that bucket that protects us from ever having to do that.”

Investments in this bucket might include GICs, money market funds, some short-term bond funds, etc. Darren says the amount in that bucket is going to be a function of your personal circumstances and preferences. Do you feel more comfortable with three years on the sidelines, or do you need five years to sleep at night?

The second bucket is what Darren calls the “income machine.” “It's your income-generating engine, and that's the amount of your portfolio that we need to produce your regular monthly income,” Darren says. “Ideally, what we have is capital that's producing cash flow enough to meet your lifestyle requirements.” Here you’ll find a lot of high-quality blue chip, Canadian dividend-paying stocks, which are a critical part of producing reliable tax-efficient income.

Darren continues, “Then, any money that you have saved over and above what’s needed in the risk-off and income-machine buckets is available for long-term growth. That's like a legacy bucket; you probably aren't ever going to need that money.”

Tax-Efficiency: A Huge Challenge

A familiar investment mantra states, “It's not what you make. It’s what you keep.” To that end, Darren says he and his team are constantly on the lookout for investments that can offer some tax efficiencies, such as a private debt fund that might only be taxed at a capital gains rate, as opposed to being treated as interest income.

Asset allocation is also key, especially in a high-tax regime. “We do our best to get interest income in your registered tax-free savings accounts (such as RIFs, RRSPs, and RESPs) that are growing tax-free, versus in your non-registered accounts where you can deduct fees and get the dividend tax credit.

Rising Rates: A Key Concern

One special concern for Darren’s team now is the spectre of rising interest rates, which impact the kind of fixed-income securities you might own. “If we're going to see lower earnings for corporate North America, then returns are likely going to be lower. If you're going to have lower returns for stocks and lower returns for fixed income, then that's going to be challenging,” Darren says, adding, “I'm not saying that's how it's going to unfold, but that's something that we're watching very carefully.”

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