Determining true client retirement readiness can be a decade-long procedure – or longer – say some financial advisors. The key is to encourage your clients to think and talk more about their plans for retirement as they move from a financial plan during the accumulation phase to a retirement plan in the distribution stage.

“To ready a client for retirement is about a 10-year experience,” says Barb Steele, CFP, RRC, an independent financial planner in Newmarket, Ontario. “You need to talk to clients about what retirement means to them, do actual plans with them so they can start to make choices and understand what will happen if there is a market crash or other scenarios. And you need to do the mathematical process of it and that takes a lot of time.”

There are so many topics clients need to think about when it comes to retirement – from what to do when no longer working and how to pay for it – that the earlier advisors begin prodding their clients, the better, says Steele.

Steele starts to talk to her clients when they are around 55, asking them questions dealing with their cash flow – how much they spend now and what they expect to spend in retirement.

Steele reminds them that while they may have the bulk of their savings in RRSPs, that money is taxable when withdrawn depending on their income.

“There are so many things people don’t think about (related to) retirement until they are actually retired. People have to start thinking about retirement when they are 55.”

Mortgage debt

Debt has also become a large issue, especially among parents who are helping out their adult children. A recent CIBC poll found that one in four parents spend more than $500 a month helping their adult children cover living expenses, cutting into their personal savings and causing them to delay retirement.

More specifically, mortgage debt remains a huge concern for those over 55, according to a Debt in Retirement study by HomEquity Bank and Equifax Canada.

That study indicates the average mortgage balance for Canadians aged 55 and over grew by 11% from $158,000 in 2013 to $176,000 in 2015. The average mortgage balance is highest in the 55 to 60 age group, at $189,000, and the lowest for the 75+ age group at $134,000. The study indicates that overall debt for those 70 and over has increased by 12% between 2013 and 2015 compared with only a 4% increase for those under 70. 

It’s statistics like these that has Steele’s clients asking questions – and wanting answers – about the future.  For example, a retirement plan (rather than a financial plan) may help clients determine whether they can defer their Canada Pension Plan (CPP) or Old Age Security (OAS), or whether they may want to work a little longer or move to a less-expensive city.

Steele agrees that a lot of assumptions will have to be made, including rates of interest and inflation, their state of health when they retire, as well as the income they will bring in during retirement.

“It’s really about planting seeds and quantifying some of this information for people.”

While Steele views current retirement readiness among Canadians as “fairly bleak,” she says it is possible to fix the situation.  “I think it’s changeable – by advisors talking to clients as soon as possible and by advisors working as a team with planners who are willing to do the calculations.”

Keyur Panchal, CFP, RRC, Investment & Retirement Planning at Royal Mutual Funds Inc., says the majority of Canadians are not ready for retirement mainly because they haven’t prepared soon enough or as effectively as they might have. “It’s all about planning,” says Panchal.

A recent survey by the Canadian Payroll Association indicates that just over one-third of Canadians expect to work longer than they had originally planned five years ago, with their average target retirement age rising from 58 to 63.

Working longer than planned

The biggest reason cited for working longer than they had planned was that they had not saved enough money, with three quarters of respondents saying they had put aside less than one quarter of what they will need in retirement.  Among those 50 and older, almost half were still less than one quarter of the way to their retirement savings goal.

Half think they will need more than $1 million in savings when they exit the workforce, consistent with the average over the past three years, says the study.

In an interview from his Mississauga, Ontario, office Panchal says most people are interested in having a “financial plan,” but don’t realize that that goes hand in hand with a “retirement plan.”

He says his biggest stumbling block is that people don’t understand the difference between the two. It’s a matter of educating the client that “the best return” does not always result in the best savings. Starting early and regularly is the best approach.

Panchal starts talking about retirement relatively early in terms of the average client’s life.

“When people get their first job, that’s the time to at least start thinking about retirement; you don’t have to start putting your plans in place, but you should at least be starting to think about that kind of direction.”

Goal setting is important – even if the client is only 28-years-old and in her first job. Panchal says he asks the client how she uses her money now and helps her make a budget, habits he hopes will continue throughout the client’s life.

Plans for middle-aged clients, aged 52-55, will revolve around the amount of funds the client currently has and whether he believes the way he is currently spending will be enough to get him through to his 90s.

Sometimes older clients come to him just before they want to retire, but don’t realize that the $100,000 they have been able to save will not be enough to make their dreams come true, especially when they might have as much as 30 years of retirement ahead.  For this category of clients, Panchal talks to them about how much they will receive in terms of CPP, OAS and the benefits of income splitting.  It’s then, he says, that some decide to either go back to work or downsize their wants.

When he makes his retirement plans, which consists of about 10-20 pages of information and recommendations, Panchal, like Steele, has to make a number of assumptions. For example, he will assume a modest 4%-6% annual return on investments and that many clients will need 70% of pre-retirement income for retirement.

A number of financial services companies have brought in “retirement readiness” calculators, but Panchal says calculators generate only the information that is put in and does not include many assumptions.

The value of specialists

Steele says advisors should be open to working with planners who specialize strictly in compiling retirement plans on a full-time basis. “There’s an expectation that we are supposed to be insurance specialists and mutual fund specialists and planning and tax specialists and we can’t do it all,” says Steele. She says financial planners regularly ask their clients to meet with lawyers and accountants and other outside professionals, so going to a retirement specialist should be no different.

While some may give the nod to the idea of retirement plans, Steele says the industry has to get behind the reality that compiling a good retirement plan takes time and expertise.

“I don’t think there’s enough encouragement for existing clients who are going to financial advisors in getting advice for their investments, insurance, etc., to suddenly flip that switch and get people thinking about what they are going to do with that money when they get to retirement.”