COVID-19 is magnifying the tendency for some Canadians to retire earlier than they had planned as their runway has been shortened suddenly by a disappearing business or changing employment situations.
Fidelity Investments Canada ULC’s 15th annual retirement survey, which was conducted in May and released in late June, indicates the prevalence of this trend even before the pandemic hit. Although 37 per cent of Canadians who have not yet retired believe they will do so before they turn 65 years of age, double that number (74 per cent of retirees) reported reaching this milestone before the age of 65.
Michelle Munro, director, tax and retirement research at Fidelity, says some workers retire voluntarily before they had planned because they’re fatigued, fed up or are required to care for an ailing or aging spouse or parent.
“During COVID-19, a lot of these existing reasons are being amplified. That’s the bucket that’s retiring earlier by choice,” she says.
“Then, you have the bucket that’s not retiring by choice, but because their job is no longer there or doesn’t [currently] exist in the way it has. They’ve been effectively downsized by COVID-19,” Ms. Munro adds.
Darren Coleman, senior vice-president, private client group, and portfolio manager at Coleman Wealth, a division of Raymond James Ltd. in Toronto, says many Canadians from all walks of life have had to face that reality.
“We’re seeing lawyers who have been affected … restaurant owners, service providers, many, many people whose plans were going along just fine and, suddenly, there’s nowhere to hide,” he says.
“If they took [financial or retirement] planning as an active process, they should be able to work with their advisors to figure out how to adjust and manage through this [situation]. … For some, they didn’t do the planning, or this was such a rapid disruption that they have had to make a lot of abrupt changes,” Mr. Coleman adds.
Daryl Diamond, financial planner at Diamond Retirement Planning in Winnipeg, says advisors with clients who have been forced to retire early can’t address everything at once. Immediate obligations come first.
“It’s always this horrible gut-wrenching, head-splitting disruption when something like this happens. … At the start it’s like those movies when a grenade goes off and a person hears ringing in their ears. That’s how traumatic it can be. So, just look at the short-term scenario – and how do we address it? It gives us time to replan,” he says.
To do that, advisors must take a look at these clients’ household balance sheets to create a picture of where their finances stand.
“Go back to Maslow’s hierarchy of needs,” Mr. Coleman says. ”What do we need to do in terms of [having a] bare minimum lifestyle? What expenses can suddenly go away? ... If there ever was a year you can have that adjustment period, this is it because a lot of those luxuries and discretionary activities have gone away. ... People who go through a financial emergency, their minds get sharp very quickly. It’s the advisor’s job to help them focus on survival and protection.”
But the pandemic won’t last forever, advisors warn. That means early retirees must be aware that they should work out future income needs accordingly.
“We would just ask them the question: ‘You’ve been doing nothing for three months. You have money building up in your bank account. Is that how you see spending your entire retirement?’ Of course, the answer is no,” Mr. Diamond says
Stuart Gray, director of Royal Bank of Canada’s Financial Planning Centre of Expertise, says that in addition to addressing these clients’ short-term financial needs, advisors need to help their clients avoid making critical mistakes.
One such mistake clients need to steer clear of is making a snap decision on how to deal with their pension plans. Clients who are angry with their now former employers may say they want their pension funds immediately. But if the pension plan is indexed to inflation, the right decision might be to leave those funds where they are, he says.
Another big mistake could be disposing of a large real estate asset at a time when the real estate market may be bouncing back in some centres, but not everywhere, Mr. Gray adds.
Finally, Mr. Coleman says that with the pandemic having sent stock markets on a wild, volatile ride earlier this year, advisors need to warn these clients about resisting the temptation to shift to more conservative investments such as bonds and guaranteed investment certificates, which won’t allow them to keep up with inflation.
“Your requirement is to have rising income, especially if we’ve just tacked on an extra eight to 10 years on the retirement,” he says.