In retirement, the emphasis in personal finance shifts to preserving wealth in order to sustain a chosen lifestyle. Wealth preservation is also important to ensure there is an estate of sufficient size to pass on to loved ones and good causes.
Here are 10 financial tips for the retirement years, offered as a complement to the tips in the previous instalments of this series. But money is not everything, of course. Whether one is spending their senior years travelling the world or simply hiking local nature trails, happiness is how you make it.
1. Money can't buy retirement bliss
Financial products are marketed with brochures full of happy faces. Don't get swept up by the cheery images, says certified financial planner Mark Cussen. "Much of the marketing material for retirees portrays a fantasy world, one with no divorce, widows or widowers, depression, loneliness or illness." Money doesn't guarantee a happy retirement; other factors, such as attitude, are important too, observes Mr. Cussen.
Similarly, another certified financial planner, Cherith Cayford, notes in the March, 2000, Canadian MoneySaver magazine: "Within about six months of retirement most people cease to obsess about finances and begin to settle down to live within their real means. Some people believe that a successful retirement is all about money but once they retire the realization dawns that, while significant, it's only one piece of the puzzle."
2. In search of yield
When interest rates are low, retirees ask: "Can you advise me of an investment vehicle that's relatively safe and liquid, which pays somewhat better than bonds or money markets?"
Gordon Pape, the financial writer and publisher of www.buildingwealth.ca, replies: "If you are prepared to take a little more risk in exchange for higher potential returns plus some tax breaks, consider adding some preferred shares, real estate investment trusts, and conservatively managed income mutual funds to the portfolio."
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Sorting through the diversity in these investment vehicles can be challenge, so Mr. Pape's The Income Investor newsletter, could be of help. Another advisory is PrefLetter, authored by preferred-share expert James Hymas of Hymas Investment Management Inc.
Not to be overlooked are the preferred shares of split-share corporations, one example being the Dividend 15 Split Corp. For conservatively managed balanced mutual funds paying monthly income, one choice is the BMO Monthly Income Fund.
3. Core/satellite approach to portfolios
Many retirees manage their own investments and pick stocks for their portfolios. But "the average investor who buys stocks tends to have a poorly diversified portfolio," say Warren MacKenzie and Ken Hawkins, financial advisers at Weigh House Investor Services and authors of New Rules of Retirement .
They say active investors would benefit from taking a core/satellite approach to portfolio management - which involves combining exchange-traded funds (ETFs) with stocks. "To provide diversification, you use ETFs, which form the 'core' of the portfolio. Then you select individual stocks that are expected to outperform the benchmarks and form the 'satellites' around the ETFs."
With the advent of ETFs, people who buy individual securities can improve their portfolios in terms of performance, volatility, tax efficiency, and costs. The ETFs "will allow investors to receive broad-based diversification and add money-making ideas."
4. Generating growth in your portfolio
One vehicle often recommended to seniors who want to maintain exposure to stocks is segregated funds, also known as guaranteed investment funds or variable annuities. They are mutual funds that come with a number of guarantees.
One guarantee promises to return of 75 to 100 per cent of principal after 10 years or at death. Such provisions help guard against the depletion of your retirement funds. They can also be an estate planning tool: if the holder dies during a trough in the stock market, beneficiaries will get at least 75 to 100 per cent of the principal - and without incurring probate fees. Other advantages include the ability to reset the guarantee as the investment goes up in value. A major drawback is that fees are higher than those of regular mutual funds.
Some "have poor or expensive guarantees, some have high management fees, and some have poor performance. Competent and independent advice … would be helpful," cautions Nepean, Ont. financial adviser, Robert MacKenzie. He recommends Standard Life's Ideal Segregated Fund Family. They "have good performance, management fees that are about the same as those of comparable mutual funds, guarantees on capital of 75 per cent after 10 years or 100 per cent at death and a lower-fee Platinum no-load option for accounts of $250,000 or more."
5. Afraid of outliving your money? Go bargain hunting!
The Only Investment Guide You'll Ever Need by Andrew Tobias first came out in 1978. A main theme was that you would be hard pressed to find a better return on your time and money than buying merchandise at the best possible price. Former personal-finance guru Brian Costello also was an advocate of bargain hunting, as highlighted in a classic 1979 television appearance.
"A dollar saved is two dollars earned," Roy Miller quips in David Chilton's The Wealthy Barber . Mr. Miller elaborates: "If by buying at a liquidation sale, Tom saves $200 on the price of a VCR, it amounts to pretty much the same as a $400 bonus [after tax] Many people would work overtime on a holiday weekend to earn a $400 bonus but those same people can't be bothered to spend three hours comparison shopping."
These days it takes much less time and effort to find deals thanks to websites like RedFlagDeals.com, shopaneer.ca, CouponClick.ca, SaveLand.ca, SmartCanucks.ca, and FrugalShopper.ca. What once took three hours now takes less than an hour. The returns to be earned on comparison shopping are higher these days.
6. Diversify with work that interests you
In retirement, most of your wealth will be in financial assets. But many retirees, especially those still in their sixties, may still have human capital that remains an asset in their total wealth picture. They may want to consider working full or part time at something that interests them - either as an employee, consultant, or business person.
Indeed, deployment of human capital in retirement years can be an integral part of life-cycle wealth management, argues York University professor Moshe Milevsky in Are You a Stock or Bond? . If your portfolio has a significant weighting in equities and the scheduled start date for your retirement coincides with a bear market in stocks, you "have the option of delaying retirement."
Even if there is no bear market, you may still wish to keep occupied with work that absorbs you. It can be beneficial for health reasons as well as for diversifying your financial portfolio against longevity, inflation, and other retirement risks (see previous instalments of this series).
7. Accumulating assets in retirement
We normally think of retirement as a time to draw down savings but many seniors may still want to save for various reasons. One of the few ways to do so on a tax-deferred basis after the age of 71 is to make contributions to a younger spouse's registered retirement savings plan (RRSP). A more recent channel is the tax-free savings account (TFSA), which allow returns to compound tax-free and do not have to be collapsed by the holder. Withdrawals also don't impact eligibility for income-tested benefits.
TFSAs can be used to save for a number of goals such as creating a larger estate to pass on to heirs. For example, many retirees deposit unneeded portions of minimum withdrawals from registered retirement income funds into TFSAs. Also, if there are non-registered accounts, the underwater stocks can be sold (to reduce taxes) and the proceeds deposited into TFSAs - as Mr. Pape discusses in Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich .
Investor Education: TFSAs
8. Estate planning
Make sure your estate is in order. Arrangements include:
- assigning power of attorney to a representative so your portfolio and other affairs can be managed in the event you become incapacitated;
- updating a will to ensure assets are disbursed as you wish upon your death;
- possibly setting up a testamentary or other trust;
- possibly paying off estate taxes and debt through a life insurance policy;
- minimizing probate fees through joint ownership, designation of beneficiaries;
- minimizing taxes at death through spousal rollover of assets, designating your spouse as a beneficiary on registered accounts;
- tax-efficient charitable giving via publicly-listed securities, charitable remainder trusts, bequeathing life insurance or registered plans.
An excellent reference book laying out the details of estate planning is Wealth Planning Strategies for Canadians 2010 , written by tax and estate lawyer Christine Van Cauwenberghe (who is also director of tax and estate planning at Investors Group). See Chapters 18 to 25 in the book.
9. Keep family in the loop
"Seriously consider having a family meeting or two to generally discuss what your expectations are for your aging and dying," suggests David Shymko, a financial adviser at Vancouver-based Macdonald, Shymko & Company Ltd.
People tend to avoid the difficult topics of death and money, which may later result in regret, hostility and rivalry among family members. A family dialogue can reduce the risk of negative feelings and strife, as well as help ensure an effective estate plan is in place to minimize the tax burden.
10. Gotcha: Public policy risks
The government is now very active in helping people prepare for retirement through tax-deferral plans and other programs. But the pressure to control escalating costs in government programs introduces risks such as "possible increases in taxes or reductions in entitlement benefits," warns Ken Hawkins of Weigh House Investor Services.
Retirement "should not be based on the assumption that government policy will remain unchanged forever," suggests Mr. Hawkins. A current example of a change is Finance Department proposals to amend the Canada Pension Plan to increase penalties for taking benefits before the age of 65. Such policy and regulatory changes represent another risk that some may want to hedge against.
This article is the eighth in a series on personal finance and investing at different stages of your life. As some issues may overlap the different stages of life, they could be covered in a prior or subsequent article.