The advisor-client relationship has typically centred on wealth accumulation, but that will soon change. As more boomers retire, advisors will need to pay more attention to helping them withdraw their savings as efficiently as possible.
Naturally, withdrawing funds is different than accumulating them. It requires a greater focus on spending – on travel and health care, for instance – and juggling RRIF removals, pension withdrawals, CPP and OAS payments, tax and more.
The first step in planning for this stage, though, is to figure out what one's first few years of retirement might look like, says Michael Erez, manager at Vancouver's Odlum Brown Financial Services.
Retirement projections, he says, should be run at least a year before retirement and should take into account what the client will be spending, whether they have any savings shortfalls and whether they plan to work later than age 65. "They need to come up with a baseline of what their taxable income might look like," he says.
Scott Plaskett, CEO of Ironshield Financial Planning, agrees. "What is your client's attainable cash flow?" he asks. "It tells you what they're hoping to receive is sustainable."
Focus on tax
As much as there is to consider when withdrawing, the main concern advisors should have is around tax, says Mr. Plaskett.
Many boomers have too much money in their RRSP and, after 71, their RRIF. Coupled with OAS, a pension and CPP, when RRIF payments are triggered, a client's cash flow can push them into a higher income bracket, forcing them to pay a large tax bill.
People have a tendency to withdraw the lower-taxed securities – like dividends in a non-registered fund – first, says Mr. Plaskett. But that could result in the client having a large tax burden later in life when they may need more of the money for, say, health care.
Instead, smooth out the tax hit by withdrawing some of the lower-taxed items at the same time as higher-taxed ones, like income from an RRSP or RRIF, he says.
Withdrawal hierarchy
One way for advisors to prepare for the withdrawal phase is to create a "withdrawal hierarchy" that outlines what should be paid attention to first, says Peter Bowen, Vice-president of Tax and Retirement Research at Fidelity Investments Canada.
Here's what should be considered in order of importance.
Consider CPP and OAS
If someone is heading into their sixties with a smaller retirement portfolio than anticipated, they may want to consider delaying CPP until age 70. That will increase their CPP payments in retirement by 42 per cent, and delay OAS to age 70, which will increase payments by 36 per cent.
Think about TFSAs
Conversely, if your client is heading into retirement in a higher tax bracket and taking money out of an account would trigger taxes, then removing money from a TFSA first could make the most sense, says Mr. Bowen. "Your client won't be triggering a large capital gain," he says.
Keep health-care costs in mind
"Very few people make it cradle to grave doing jumping jacks every day," says Mr. Plaskett. He suggests setting aside a health-care fund, and carrying health insurance from an employer over into retirement. Mr. Erez is a fan of long-term-care insurance, especially if someone doesn't own a home they can sell. It should be obtained sooner rather than later, as premiums go up as people age.
Consider selling securities
A client may want to sell equities in non-registered accounts that have lost money, says Mr. Bowen. "Particularly if they've had capital gains in the previous three years and [they] can carry that loss back," he says. "That can recover some tax benefits from previous years."
Use T-SWP, a.k.a. T-Series, strategies
If a client holds mutual funds and is in a high tax bracket, using a T-Series strategy can help defer tax. Rather than selling an investment every month to generate cash flow, the client can receive a distribution that's actually a return of capital – and returns of capital are not immediately taxed in the client's hands.
Ultimately, a client's financial position at retirement will determine the best approach. But the key to helping clients at this stage in their life is to tell them that there's more to retirement than just pulling money out of an RRSP.
"It's about being opportunistic," says Mr. Erez. "Tweak it to your advantage."
This content was produced by The Globe and Mail's Globe Edge Content Studio, in consultation with Fidelity Investments. The Globe's editorial department was not involved in its creation.