Until people get close to retirement, their financial planning is really quite simple. Pay off as much debt as possible, starting first with postsecondary school loans, then mortgages and other credit, and sock away as much as possible in pensions and registered and non-registered investments.
Whether you are taking an active or passive approach to investing, the goal is the same. "You take a blunt instrument approach to saving for retirement, you just shovel as much of your income into investments as possible while making sure you pay attention to the risk-return equation," said Michael Lynds, senior vice-president of products and services with Macquarie Private Wealth in Toronto.
That all changes as people approach and enter retirement, Macquarie argues. The investment firm recently developed a strategy, Critical 10, to deal with what it says are the most important financial years for the typical Canadian: the five years prior to retirement when earnings and asset accumulation are hopefully at their peak, and the first five years of retirement when spending, and the chances for missteps, are potentially greatest.
The jump from the working to retirement world, which can be so jarring emotionally, can be just as abrupt from a financial standpoint.
"You are now looking at deaccumulating your wealth, so there is a draw-down mode, so the advice side of the equation becomes exceptionally important," he said.
That is because drawing down your assets in retirement encompasses more than simply ensuring that you have enough money to cover living expenses and such lifestyle choices as vacations and golf fees each year, but also that you are not pulling so much out of your retirement nest egg that you are bumping into higher and higher tax brackets.
"When you are drawing down on your investments, you are really talking about tax bracket management," Mr. Lynds said.
Tax bracket management, or retirement income planning, covers just how much income people should draw from various sources: tax-deferred, tax-exempt and taxable income accounts. All without needlessly stumbling over a tax bracket trip line.
It's an underdeveloped component of the financial adviser's toolkit, said the Macquarie adviser, which is surprising given that millions of baby boomers are now moving into this phase of wealth management.
Mr. Lynds doesn't think a lot of advisers are very skilled at thinking in those terms because we've been programmed to follow a "blunt" investment philosophy of just plowing money into savings. "You have to rearrange your thinking to getting all this money out in the most tax-efficient way possible."
Daryl Diamond, president of Winnipeg-based Diamond Retirement Planning and author of Your Retirement Income Blueprint, agreed that the financial services industry and its clients have some work to do when it comes to better managing the shift from accumulating wealth to spending it.
"The mistake we see in so many cases is people deferring all of their registered assets as long as possible," he said.
He speculated that the prevailing "wisdom" calling for retirees to dip into registered retirement savings plans last might be a lingering hangover from the time when there weren't efficient vehicles for deferring non-registered assets such as tax-free savings accounts, corporate class funds and life insurance. "It's astounding to me that it still persists today that that is the proper thing," Mr. Diamond said.
Instead of advising retirees to draw down their most tax-efficient retirement funds at the lowest tax rates, he recommends that people withdraw a mix of registered and non-registered assets. "There is usually a happy blend, but it depends on the circumstances, and the dollar amounts and the cash flow requirement and the age of people, the health of people.
"That is the fascinating thing about the retirement income market," he added. "There is no rule that applies to everybody. It is all surgical."
Those entering retirement should re-examine their sources of income. While they spend most of their working years concentrated on their investment portfolio, they now need to think about guaranteed sources of income (company pension, government supplements) and their registered and non-registered accounts.
That includes creating new, steady streams of retirement income. "There is a resurgence in interest around things like personal and corporate annuities," Mr. Lynds of Macquarie said. He advises that recent retirees consider "pensionizing" some of their variable assets (those still in their investment portfolio) to increase the portion of their income that comes from reliable and predictable sources.
Annuities fell out of favour as tumbling interest rates and a lower inflation environment made them less attractive with traditional market investments. Annuities are gaining attention again in the wake of the gut-wrenching market crash of 2008 and the sense that the decades-long bull market in bonds has ended.
"You can have a certain portion of your income that is variable, but there are going to be portions of your income that you rely on that must be guaranteed," he said. "Being sensitive to the tax bracket management concept, you must pensionize, or put into an annuity, some parts of your sources of income."
Not everyone in the financial services industry thinks more annuities are the way to go, however. "If you have a pension plan, you have a sort of annuity," said Adrian Mastracci, a fee-only portfolio manager with KCM Wealth Management of Vancouver. "CPP [Canada Pension Plan] is an annuity, so is OAS [Old Age Security]. Between the pension plan and the two government benefits most people have enough annuities.
"Additional annuities make sense for one kind of person, that is the kind of person who spends a lot or spends too much," he said. "In that case, an annuity sort of limits how much you can spend and how quickly you deplete your stash."
Special to The Globe and Mail