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Money. Happiness. Family. How do we define success?
Our shift to goals-based benchmarking about two years ago has been a real eye-opener, especially during our discussions with families regarding their specific savings objectives.
The most common concern that comes up during our interview process is whether there is going to be enough built-up savings to maintain a desired lifestyle into retirement. This could mean having the ability to buy a U.S. vacation property, finally getting to that renovation, or simply having the freedom to not have to worry about one’s financial affairs, especially during unexpected events.
It is not surprising that making savings last is a top concern. According to a report released this past week by the World Economic Forum, retirees in six major economies are expected to outlive their savings by eight to 20 years on average. Here in Canada, the report estimates that men will outlive their savings by 9.9 years and women by 12.7 years.
When it comes to addressing the problem, skipping that daily coffee purchase simply isn’t going to cut it. Rather, people are going to have to take a much more proactive and serious approach to how their wealth is being accumulated and managed. This could mean adjusting savings rates and lifestyles, in addition to potentially onboarding risk sooner to account for increased longevity and future retirement needs.
Unfortunately, for those further along and about to enter retirement, what worked in the past is no longer an option. Baby boomers can’t deploy the same low-risk GIC-buying strategies as their parents did because, with interest rates setting record lows, they are insufficient to meet spending needs while preserving desired estate values. Making matters worse, few have defined benefit pension plans, so return shortfalls will have a direct impact on financial well-being.
As a result, in some cases adjustments will have to be made to spending rates in retirement and/or expected ultimate estate values.
The WEF report discusses undertaking what they call a decumulation review which means setting a realistic forward assumption of what one will spend in retirement.
While many have a rough idea of their financial picture, most do not have it specifically mapped out in a formalized cash-flow forecast that factors in future incomes and expenses. This is a great first step that should be undertaken before making any changes to how one’s portfolio is being managed. Once complete, a capital asset forecast can be done under different asset allocation scenarios between fixed income and equities using conservative return assumptions to show the impact on one’s financial position over time.
The real risk people need to manage when investing in their future is the risk of outliving their retirement savings
Finally, once an allocation and a reasonable return target is set, the portfolio should be managed to mitigate risk as much as possible to achieve that goals-based return.
For example, the WEF report suggests the concurrent need to manage this risk through proper portfolio diversification, including moving beyond domestic bias and into international markets. We see this all the time with Canadian equities often dominating a portfolio, meaning that approximately 50 per cent of their equity position is exposed to financials and energy compared with only 25 per cent in global markets.
As I highlighted in a recent column, we would take this a step further by also recommending looking at the types of fixed income in a portfolio along with diversification by global market capitalization, REITS, low volatility and possibly some alternative strategies.
Overall, investing in one’s financial future involves a bit of upfront work but having a formal plan and a systematic approach to managing risk will go a long way to securing the desired retirement.
• Martin Pelletier, CFA, is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.
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