Gradual retirement poses planning challenges
TORONTO (Reuters) - Retirement planning once meant plugging a client's 65th birthday into a spreadsheet and going from there. But with more Canadians than ever saying they plan to retire gradually, financial advisers are faced with a growing set of unknowns as they help clients plan for their golden years.
"It's becoming totally different. People are no longer retiring as much as they are redirecting," said Jill Chambers, a certified financial planner at Integrated Wealth Management in Calgary.
"They are going from a predictable full-time salaried position to something totally different. It isn't just a line in the sand: 'Today I'm a worker and tomorrow I'm a retiree.'"
A majority of Canadians say they plan to work after retirement or transition to retirement with a gradual easing of workload. Experts expect the trend to continue as people live longer and healthier lives, making work possible, and carry more debt into retirement, making work necessary.
A survey released in January by Desjardins Insurance found 75 percent of Canadians planned to transition into retirement over time, rather than stopping work suddenly.
And while financial need seems an obvious reason to work longer, the survey showed just as many of those who felt financially secure wanted a gradual retirement as those who felt less secure.
"The traditional notion of retirement — of packing up your office at the end of your last day and completely changing your life — is ending," Angela Iermieri, financial planner with Desjardins Group, said of the survey.
A similar survey by BMO Financial Group, also released in January, found 81 percent of Canadians plan on working in some capacity during their retirement. Some 39 percent plan to start their own business after age 65 - with 75 percent motivated by the need for income and 62 percent citing a desire to stay mentally focused.
While the trend has an obvious upside in that clients may need to draw on less retirement savings in the early years of retirement, advisers must plan for a range of possible outcomes and expenses beyond the traditional planning scenarios.
"Because there is no fixed date, it makes the financial planning process more complex," said Marlena Pospiech, senior manager at BMO's wealth planning group.
"At that point it is really important - despite the ambiguity and vague goals - to try to be as clear as possible in envisioning the various possibilities and perhaps modeling different scenarios as opposed to one scenario with one fixed date," said Pospiech.
With software, an adviser can run through what retirement will look like if a client's income drops by 75 percent, 50 percent, or 25 percent after retirement, as well as what their expenses will look like if extra insurance is needed or travel is a priority. Seeing a few scenarios may help clients focus their planning, even if retirement remains decades away.
The first priorities Vancouver financial planner Erika Penner considers are health insurance and taxation. If a worker leaves his or her company and signs back on as a consultant or contract employee, health benefits may be gone - so workers should look into extending group benefits if they can.
Penner also notes that if a partly retired client earns too much money in retirement, the government may claw back Old Age Security (OAS) benefits or take back so much income in taxation it may not be worth it to continue.
"The question you have to ask a client is: 'Why are you wanting to do this?'" said Penner, a certified financial planner. Some people simply want to stay active and engaged, in which case volunteer work may suffice. For some, the money isn't important, in which case they may shrug off the OAS claw-back.
"If they decide if they still want to work, they have to look how to structure their finances to be as tax efficient as possible, so that their income isn't going to be taxed at the highest tax bracket," Penner said.
The common dream of launching one's own business in retirement brings its own challenges, including the risk of spending retirement savings without getting a successful enterprise off the ground, Pospiech said.
The BMO survey found 47 percent of those planning to start a business in retirement planned to use a portion of their retirement savings to fund the enterprise.
With enough time to plan for such a transition, advisers can help a client shift assets to maximize flexibility, collapsing a Registered Retirement Savings Plan into a Tax-Free Savings Account, setting up a prescribed annuity or simply ensuring an untapped line of credit is in place before it is needed.
"They definitely need to think long-term about what's going to be needed for that (future) job," said Penner. "You have to look at a variety of products and scenarios."
For Chambers, transitional retirement planning means helping clients clarify what they want from retirement long before they get there - the better to avoid the paradox of retiring too early and then trying to get back into the workforce.
"You need to answer two questions: what are you retiring from, and even more important, what are you retiring to? What are you going to be doing? And until you have really good solid answers to both questions, you're not ready to retire."
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