The youngest baby boomers, those who were born in 1964, have now turned 50 years old. If they haven’t already done so, many will soon start thinking about retirement.
Many of Orville Acton’s 50-year-old financial planning clients are talking about retiring later or taking partial retirement. “They are now in their high income-earning years, but they realize that they haven’t saved a lot,” said Acton, a financial advisor with Edward Jones in Weyburn, Sask. “They are still raising children and face education expenses, and they have aging parents who may need help with their care. And home prices have risen dramatically in recent years. Even with today’s record low interest rates, much of their income is going into mortgage payments, which doesn’t leave them with a lot left over for their retirement savings.”
The financial challenges that clients in this age group face is mind-boggling, added Chris Buttigieg, senior manager, wealth-planning strategy, at BMO Financial Group in Toronto. “They want to purchase that special home and perhaps a vacation home as well. They want to pay off the mortgage. They want to save for their kids’ education. They want to see that their parents are well looked after. And they have to prepare for their own retirement – which, come to think of it, is just around the corner.”
Good retirement planning applies even more to young boomers than to their older siblings,” Acton said, “because there are now fewer defined-benefit employer pension plans around. They will need market-based retirement plans. This means they have to consider whether they can live on reduced incomes in down markets. If they can’t, they will need more guaranteed investments in their portfolios – but these investments will have lower returns than higher-risk investments.
“And they may need to go back and take a realistic look at exactly what they must have in retirement income every month to cover the basics of food, clothing and shelter. This may mean skipping some vacations.”
Acton has his clients set multiple goals that they commit to meet. “The first is having the mortgage paid off before they retire,” he said. The second goal is retirement saving, and he discusses with them how much money they will need to achieve the retirement lifestyle they envision. He determines the income sources they will have in retirement, including government pensions and workplace pensions. “If those are not enough, they’ll have to figure out how much they will need to put aside to achieve their retirement lifestyle.
“Then I show them where we’ll put their money in order to achieve financial freedom. And I stress that insurance plays a big part in protecting their financial plan. They need to prepare for the unexpected: disability, critical illness, premature death and long-term care.”
Acton noted that some people regard their homes as their LTC plans, which is probably not wise. “But LTC facilities may become very expensive down the road. And when they need to sell their homes, they may not be able to sell them at the prices they had anticipated. And if the client moves into a LTC facility, his or her spouse will still need a place to live.”
He joked about the strict retirement planning regime he has his clients on. “One reason people don’t want to go to a financial advisor is they’re afraid they won’t be able to have any more fun.
“But I tell clients that they shouldn’t necessarily plan on retiring at 55. To do that, they would probably be so busy saving that they might miss out on doing some important things, such as spending time with family, while they still have their good health.”
Buttigieg hopes that 50-year-olds will learn some valuable lessons from the predicament some of the older boomers found themselves in. “The first boomer cohort turned 65 in 2011, just after the 2008 financial crisis. Approaching retirement, they should have been investing conservatively, but many weren’t. Those who weren’t were in bad shape when their portfolios were hit with a 30%-40% correction.”
On top of that, a recent BMO Wealth Institute Report found that 40% of current retirees had to retire sooner than they had expected because of health issues or job layoffs. “It is critical that Canadians consider the possibility of an unanticipated retirement date,” Buttigieg said.
The report also found that only 40% of current retirees are using employment pension plans to help fund their retirement. “Given that employer-funded pension plans are becoming increasingly rare, Canadians should not count on them as primary sources of income in their later years,” Buttigieg said. “Rather, they should consider any pension plan as a supplementary component of their overall income.”
He suggested that advisors stress-test their clients’ financial plans. “Your clients no doubt have a retirement date in mind. Say a client wants to retire 15 years from now. Create a financial plan for him that is geared to this date, then run a series of different scenarios. What if the client has to retire 10 years down the road? What if he has to retire in five years? His income will stop at that point, so he won’t be able to save any more money.
“Run these scenarios for the client to show him what his retirement lifestyle – over 30 years – would be if he had to leave the workplace early. And index each scenario for inflation. He may see that he’ll have a shortfall at age 82.”
What can be done to mitigate that shortfall? “Your client can start putting more money aside right now or he can lower his expectations. He may have to retire on $60,000 a year, instead of $80,000 a year. Or he may want to look at components of his lifestyle that he can live without – such as dropping his private club memberships.”
Buttigieg noted that advisors can use BMO’s online calculator to project the savings their clients will need to meet their retirement goals.
“Being 15 years away from retirement should give 50-year-olds plenty of time to ramp up their retirement savings,” he said. “But it will mean making a commitment to doing so – right now.”