The Boomers Retire

It’s no secret that the interests of financial advisors and their clients are not well aligned.  Even financial advisors who mean well can believe that a choice is best for the client when it’s really best for the advisor.  That’s the nature of conflicts of interest.  These conflicts will shape how advisors use the book The Boomers Retire: A Guide for Financial Advisors and Their Clients, whose fifth edition was written by Alexandra Macqueen and David Field.  Lynn Biscott wrote the earlier editions.

Throughout my review of this book, I will sometimes be commenting on the substance of its contents and sometimes on how financial advisors might use or misuse the contents, which is arguably not the fault of the authors.

The book covers a wide range of important topics that financial advisors should understand, including government benefits, employer savings plans, personal savings, investing, tax planning, where to live in retirement, insurance, and estate planning.  Here I discuss a few of the subject areas that stood out for me.

Life Expectancy

A big challenge with managing money through retirement is not knowing how long you’ll live.  I sometimes hear people talk about planning for a retirement that will end in their early 80s.  There are two problems with this.  One is that it is based on life expectancy from birth.  If you make it to age 60 or 65, your median life expectancy is longer than it was when you were born.  The second is that it makes little sense to make a plan with a 50% chance of failure.

The authors address these problems sensibly.  FP Canada standards “recommend that planners project life expectancy to the 25th percentile,” which is 94 for men and 96 for women when starting anywhere from age 55 to 70.  “For some clients, who are longevity-risk averse, a 25 percent probability will not be sufficient and advisors will want to plan to the more conservative 10 percent probability.”  This adds about 4 years to the planned retirement length.

When to take CPP

Canadians can start collecting CPP anywhere between age 60 and 70, with 65 considered the “standard” starting age.  Starting CPP at 60 reduces benefits by 36%, and starting at 70 increases benefits by 42%.  These percentages are higher when the average industrial wage grows faster than inflation, as it has done on average.  The 36% reduction might be somewhat smaller if there are non-contributing years between age 60 and 65.

These decreases or increases in CPP benefits are permanent.  Consider twin sisters, Anna and Brie with identical CPP contribution histories.  Anna takes CPP at 60 and Brie waits until she’s 70.  Anna receives CPP payments for 10 years that Brie doesn’t get, but from age 70 for as long as they live, Brie’s monthly benefits will be 2 to 2.5 times those of Anna.

There are many factors to take into account in choosing when to start collecting CPP.  However, if we consider only an advisor’s financial interests, the decision is easy.  If the client takes CPP at 60, she will spend less of her savings, leaving more assets under management to generate income for the advisor.  With this in mind, let’s look at the authors’ list of “factors” to consider in the timing of CPP benefits.

“If the client receives the retirement benefit at an early age, does that reduce or eliminate the need to draw on investments to cover expenses?”  It’s important not to spend your savings down to zero leaving no margin for error, but as written, this question makes it seem like preserving all savings is vital.  There’s nothing wrong with spending down savings somewhat in anticipation of larger CPP benefits in a few years.  Focusing too much on preserving savings serves the advisor’s interests more than the client's.

“Many people believe that it’s best to take the benefit as soon as possible so as not to miss out should they die prematurely.  This approach has some merit for couples where each spouse is entitled to CPP/QPP is his or her own right [because CPP survivor benefits may be modest].”  It’s true that many people think this way, but the truth is that most people will ultimately get more from CPP if they wait to start.  Income for a surviving spouse is a consideration, but the advisor’s job is to work out what’s best for the client even when it goes counter to the client's emotional preference.

“If the client stops working at 60, but waits until 65 to apply for the benefit, … her record will show five years of zero contributions — which may reduce her entitlement when the retirement benefit is calculated.”  This is true, but the effect is often small enough that it’s still best for the client to delay CPP.

Among the techniques listed to smooth income over time and reduce “clawbacks and higher taxes rates” are “Taking CPP/QPP and OAS as early as possible,” and “Starting RRSP withdrawals earlier than required.”  In most cases, RRSP/RRIF withdrawals can be used to hit any desired level of taxable income.  Wealthy clients without RRSP savings could realize capital gains to hit an income target.  Needing to use CPP and OAS to increase income in a client's 60s appears to be rare.

All the information the authors provide about CPP would be useful to an advisor planning to do all the calculations necessary to determine what’s in the client’s best interests.  However, there is no direct guidance for doing these calculations.  This part of the book is more directly useful as a playbook for self-interested advisors to encourage their clients to take CPP early.

Pension or Commuted Value

When leaving a job with a pension plan, a big decision is whether to take the eventual monthly pension or take the commuted value of the pension to invest in a Locked-in Retirement Account (LIRA).  This is another example of a choice where advisor and client interests are not aligned; the advisor has nothing to manage if the client doesn’t take the commuted value.

In this case the authors do a good job explaining the considerations that go into making this choice.  I’ve seen too many cases where people (helped by an advisor) took commuted values when they shouldn’t have.  However, advisors not blinded by self interest could use the authors’ advice to come to a sensible decision for their clients.

Rolling RRSPs into RRIFs

Clients need to “make a new beneficiary designation when they roll an RRSP into a RRIF.”  “The designation that was made on the RRSP does not automatically carry over to the RRIF.”  That’s definitely something I could miss.  We’ll see if the calendar reminder I set will still be there that far into the future.

“Originally, financial planners were taught that the best approach to drawing funds from a RRIF was to wait until” age 71 to maximize “tax-deferred accumulation of funds.”  “The problem with this approach is that it sometimes results in a low taxable income between retirement and age 71, followed by required RRIF withdrawals that are higher than the client needs.”  The client may end up “in a higher tax bracket” and “may be subject to clawback of their OAS benefits (including GIS) and their age credit.”

“Today, most astute planners would agree that a more sensible approach is to create a level stream of income, including both registered and non-registered sources, throughout the retirement period.”  This is consistent with various retirement simulations I’ve done.

“To take advantage of the [$2000] pension income tax credit at age 65,” a client could “transfer at least a portion of his or her RRSP into a RRIF or annuity at that age.”  This makes sense, particularly if you’ve already decided to start drawing from RRSPs.

Annuities

A big problem with common annuities is that their payments aren’t indexed to inflation.  I’m not aware of any insurance company in Canada that sells CPI-indexed annuities.  It seems the best you can do is add a fixed percentage annual increase to annuity payments, such as 2%.  However, the authors dismiss such increases as “costly as it increases the purchase price of the annuity.”

In a later section on choosing an annuity or a RRIF, inflation isn’t mentioned as a factor to consider.  Few people, including both clients and advisors, seem to understand the devastating effect decades of inflation can have on a retiree's income.  Even seemingly low inflation builds up significantly over time.  Clients considering fixed annuity payments seem unable to understand how much their buying power will erode after a decade or two have passed.

Reverse Mortgages

In an otherwise thorough discussion of reverse mortgages, not mentioned is a common clause that retirees must properly maintain their homes.  It’s common for people who’ve always kept nice homes to become old and unable to maintain their homes to a reasonable standard.  They stop caring about a broken deck, squirrels in the attic, or cat pee on the basement floor.  A motivated lender could use this clause to force such people out of a home when the reverse mortgage is no longer profitable for the lender.

Index Investing

It was good to see low-cost passive investing mentioned among more questionable investment choices such as segregated funds, guaranteed minimum withdrawal benefits, index-linked GICS, and principal protected notes.  As for mutual funds, according to Morningstar, in 2019 “the asset-weighted median expense ratio of equity funds in Canada is 2.28 percent, while the fixed-income funds come in at 1.49 percent.”  It would have been nice to see these costs illustrated with their effects over 25 years, 43% for equity funds and 31% for fixed-income, but at least these high costs were mentioned.  Index (passive) investing cuts these costs considerably.

RRSP vs. TFSA

At one point the authors describe TFSAs as “an even better shelter than registered savings, which are only tax-deferred.”  Some readers may take this to be true in general (it isn’t); it only sort of makes sense in the context where the comment appeared.  The context is the strategy of smoothing income in retirement by drawing down RRSPs before age 71.  If the withdrawals aren’t needed to live on, moving them to a TFSA has tax advantages.

In general, if your marginal tax rate (adjusted for relevant clawbacks) is the same when you contribute to an RRSP as when you withdraw, then RRSPs and TFSAs shelter you from taxes equally.  In the context of the strategy the authors were describing, a client would be changing the timing of RRSP/RRIF withdrawals to get a lower marginal tax rate.  The fact that a TFSA is involved in this strategy doesn’t somehow make TFSAs better than RRSPs.

Medical Expenses

“To maximize the benefit of the [medical expenses] tax credit, the lower-income spouse or partner should consider claiming the expenses for both.”  I ran into a case where this advice isn’t right.  If the lower-income spouse’s income is too low, it might be better for the higher-income spouse to make the claim.

Low Income Retirees

“Many Canadians will have modest incomes in retirement, but retirement planning advice often focuses on people with higher incomes.”  Very true.  It’s good to see a section on lower income retirees in a book aimed at financial advisors.

“Advice targeted at higher-income Canadians can be unsuitable for people retiring with lower incomes, because following it can lead to low-income retirees paying more tax in retirement or receiving smaller benefits from government programs.”  The existence of the GIS and other income-tested benefits causes low income retirees to have very high “marginal effective tax rates,” which changes what strategies they should follow.

Where to Live

The chapter on where to live in retirement is excellent.  It covers country property, seniors communities, snowbirds, moving to another country, foreign income taxes, retirement homes, and long-term care.  I found the extensive checklists for buying new or used condos valuable.

I have power of attorney documents set up, but something I’ve never thought about is that “Power of attorney documents should also be created in any place where you will be spending a lot of time.”  My POAs may not work well outside of Canada.

Insurance

The chapter on insurance paints a picture of critical illness insurance and long-term care insurance as necessary for most retirees.  I would have thought Canada’s health care system would make these forms of insurance less important once you’re not protecting an income, but I don’t claim to have much expertise in this area.

On the subject of dental insurance, the authors make the sensible point that “the amount of coverage is rarely more than the cost of the insurance.  With the low amount of reimbursement, it can barely be considered insurance, and functions more like a ‘cost-smoothing’ mechanism.”  “A retiree is often better off opting out of dental insurance entirely.”

Some good advice on travel insurance: “When evaluating travel insurance providers, plans that pay for medical care directly instead of reimbursement for expenses is best.  It is also important to understand what the insurance company’s claim service is like.  Some provide an international number to call and then they take over.  Not all insurance providers will give that level of service.”  “The cost of travel insurance may be claimed as an eligible medical expense on your yearly tax return.”

The authors offer some reasons why a retired couple would need permanent life insurance, including “lost ability to income split,” and “any reduced benefit from the Canada Pension Plan.”  The fate of a surviving spouse is important to consider.  Not mentioned is the need for detailed calculation.  To start with, a single retiree eats less food, buys less clothing, and spends less than a couple in other ways.  So, it’s important to estimate the reduction in cash flow required by a single retiree compared to a couple.  Then comes calculating how after-tax income would drop if one spouse passed away at various ages.  Only then do we see if any life insurance is needed.  It could be that none is needed, or possibly just term life insurance for a decade.  Without performing these calculations, the image of a lonely retiree losing a spouse and struggling with money becomes just a way to sell expensive life insurance.

Estate Planning

I found the estate planning chapter to be a helpful overview.  An interesting problem I’ve seen multiple times is that “Some financial institutions incorrectly insist that their own form be used to convey POAs.  Clients should think carefully before they sign these forms.  Doing so could cause a previously drafted POA to be revoked.”

“One way for clients to [reduce probate fees] is to gift assets while they are still living.  Many retirees choose to help family members in this way, so that they have the pleasure of seeing their gift put to good use and benefiting others.”  This is what I plan to do.

Conclusion

This book addresses the many complex issues where clients need help from their advisors.  In general, the relevant factors in making these decisions are discussed.  However, advisors seeking to serve their clients’ best interests will need other resources for how to go about performing the necessary calculations to make these decisions.  Advisors blind to their own self interest will find that deciding these matters in their own favour requires few calculations, and they won’t need additional resources beyond pulling quotes selectively from the book.  The authors can’t be blamed if their book is misused in this way; after all, any tool can be used for good or bad purposes.  However, I would like to have seen parts of the book explore how to do the calculations behind making an important decision.