Sharing a meal recently with a group of seniors at a retirement home was a lesson in aging with grace and pluck and wisdom. Every person at the table, whose ages spanned 85 to 96 years, were dealing with cognitive and mobility challenges of some sort, but that didn’t deter them from enjoying life in the moment.
Everyone at the table was there because of affordable lifestyle choices and wise financial planning. When the conversation turned to finances, one of the women at the table said, “I’ve had my financial advisor for 50 years and I’ve told him that he can’t die before I do!”
Start with your goals
Warren MacKenzie, author and head of financial planning at Optimize Wealth Management in Toronto, offers clients a myriad of financial advice and choices, including investments, tax preparation, will and estate planning, and insurance products.
Despite the many considerations when investing in your 80s and beyond, start with a foundation of financial sustainability. “Be clear about your retirement goals,” says MacKenzie. “Be in a goals-based portfolio.”
MacKenzie stresses the importance of using an investment policy statement to establish a financial planning discipline to span a lifetime. An investment policy statement takes into account such details as the assets available in your portfolio, the level of risk and the rate of return that you’re trying to achieve.
Once that is established, your asset mix of cash, equities and bonds should be designed to earn the rate of return necessary to achieve your goals. “For example,” says MacKenzie, “your goals might be to not run out of money before you’re 105.” So based on the money an individuals has and their lifestyle expenses, they might need a return of 5% from a portfolio. “But if 3.5% is enough to achieve your goals, it is something you should aim for,” adds MacKenzie. “You should take no more risk than is necessary.”
Less money = more planning
If your investment plan shows that you’re going to run out of money at say, age 90, then you’ve have to do something different. “If that’s the case,” says MacKenzie, “by cutting spending by maybe 10%, you could stretch that out. The less money you have, the more important it is to have a good plan.”
A common, dated rule is that the equity portion of a portfolio should be 100 less your age. So if you’re age 80, you would have 20% in equities. “But I don’t agree with this rule.” says MacKenzie. “Many people in their 80s may live to 100 or longer (such as this writer’s father-in-law), and if almost all their portfolio is in fixed income investments, they will not have inflation protection and earning power,” he adds.
To protect your portfolio throughout your lifetime, William Jack, an actuary and fee-only financial advisor at William D. Jack & Associates, Inc. in Toronto, says that “understanding your lifestyle spending is absolute.” When assessing your spending, factor in what you’re planning to do over the next 5, 10 or 15 years and how much that’s going to cost you.
What Jack says is key is to establish a “de-cumulating” strategy of withdrawals in order to sustain a portfolio over a lifetime. In that regard, there are two withdrawal strategies; systematic withdrawals and life annuities.
Look at where your income comes from
According to Jack, if an individual uses systematic withdrawals, they have to come up with a fixed strategy, such as a percentage of funds that allows them to fund their lifestyle without running out of money. Systematic withdrawals include zero, fixed or managed withdrawals.
“So for example,” says Jack, age 73, “the withdrawal strategy that my wife and I are using right at the moment is zero – we’re living off our investment income from non-registered savings.”
An example of fixed withdrawals is a strategy of withdrawing a percentage of funds from investments, such as 5%, in order to meet spending needs and lifestyle goals. “In this low interest-rate environment,” says Jack, “my wife and I are implementing ‘managed’ withdrawals, where, if our investments are doing well, we can spend more, and if they don’t do well, we spend less. So we manage our lifestyle to fit our investment performance.”
When it comes to managing investment and market risks in retirement, both Jack and Mackenzie say that life annuities offer protection against many risks. When you buy a life annuity, an insurance product, you forfeit the money given to an insurance company but there are many financial advantages after doing so.
Annuities can sometimes be an answer
“With an annuity,” says Jack, “you’re on auto-pilot. They issue you a cheque and deposit it into your account each month guaranteed for life. You don’t need to worry about cognitive decline, longevity, investment risk, fraud or market volatility.” Yet Jack doesn’t recommend that anyone should put all of their money in a life annuity. “You could put in a chunk of your money in an annuity and the rest in investments,” he says.
In the recent federal budget, the government is permitting seniors to purchase an advanced life deferred annuity (ALDA), under certain registered plans. Under this plan, the commencement of an annuity can be deferred until age 85.
Be cautious of cognitive decline
Among the many risks that can occur when managing finances as we age, cognitive decline warrants careful consideration. “Personally,” says Jack, “I am very aware of the fact that in five, 10 or 15 years, I’m not going to be able to make wise decisions.”
The challenges in making wise decisions when aging was discussed by Morningstar’s director of personal finance, Christine Benz, in an interview with Carolyn McClanahan, co-founder of Whealthcare Planning. According to McClanahan, shared in the article, Don’t let cognitive decline derail your finances, within the population aged 65, about 10% of people have Alzheimer’s, so true dementia. And an even higher number have mild cognitive impairment, which means you can still function well, but you just don’t think as well as you used to. “The older you get,” she says, “the numbers get scarier. So, it’s important for people to plan for this.”
As we age, we tend to become more “concrete” or set in our thinking, says McClanahan, so it’s important to have a network of trustworthy people, such as an adult child, family members, and close friends, to create transparency and awareness of your financial situation.
Get an advisor you can trust in more than one way
Such prudent planning might include a trusted financial advisor to manage your portfolio. When choosing an advisor, “it’s important to note,” says MacKenzie, “that there are two standards; the suitability standard and the fiduciary standard.”
To illustrate, if someone goes to an advisor who works under the suitability standard and they ask for an investment in Canadian equities, the advisor can suggest any Canadian equity product. The advisor could be biased towards a product, based on commissions. “It could be a mutual fund that pays the advisor a huge trailer fee,” says MacKenzie, “it could be a lousy fund, but it’s a Canadian equity product. That’s the suitability standard, you got what you asked for.”
“When you’re failing a bit,” says Mackenzie, “you want to be working with an advisor that’s required under law and ethics to act as a fiduciary. Under the fiduciary standard, I have to do what’s right for you,” MacKenzie says. “If the fund is a lousy one, I’m going to give you a good one, that’s the difference.” So do your homework, and ask what standard the advisor follows.
Also be aware of management fees and compare the performance returns in a portfolio to a benchmark, such as the TSX Index.
