24 FORUM SEPTEMBER 2012

RETIREMENT PLANNING

Advising Boomers

SEPTEMBER 2012 FORUM 25

It’s no secret that Canada’s baby boomers are putting an increasing strain on health care andpension plans across the country. However, whilethis poses significant socioeconomic concerns, amassive wave of retirees in Canada also presents a huge opportunity for financial advisors: helpingbaby boomers transition into retirement

By Michael Callahan

CASESTUDY

Baby boomers were born during the demographicpost-World War II “baby boom” between the years 1946and 1964. In Canada, the evidence of this boom is allaround as every day 1,000 seniors turn 65.Earlier this spring, Statistics Canada released its latest

findings based on the 2011 census data:• In 1961, at the peak of the baby boom, 34 per cent of the Canadian population was aged 14 and under. By 2011 that share had been cut in half to 16.7 percent.

• In 1971, only eight per cent of Canadians were 65 and older. By 2011, our seniors population had ballooned to 14.8 percent — almost 5 million seniors out of 33.5 million Canadians.

• Over the next two decades, it’s forecast that almost one-third of all Canadians will be 65 and older.

• In 1961, the median age in Canada was 26.3. Last year it was 40.6.Boomers control a staggering amount of the wealth

in Canada. Just how much? According to InvestorEconomics Inc., over 70 per cent of all the wealth inCanada resides with baby boomers. Furthermore, it’s beenestimated that boomers are set to inherit over $1 trillionfrom their parents over the next 20 years. Economists sayit’s the biggest transfer of wealth in Canadian history.While many advisors often target business owners,

doctors, and other professionals as potential clients, theyshouldn’t overlook the absolutely massive amount ofwealth that resides with boomers, including those whoare not necessarily business owners who happen to bemarried to doctors.Let’s consider a few common issues that come up with

many baby boomer clients as they prepare for retirement.

Income generation. During our working years, we puta heavy focus on capital accumulation and growth. Inmany cases, this pool of capital will be used, either in partor in whole, to generate an income in retirement. It fol-lows that at least some segment of most advisors’ clientsdraw an income from their investments. How are they

generating this income? Investment portfolios consistingof stocks, ETFs and mutual funds, a laddered GIC strat-egy, corporate and government bonds, and annuities areall valid options.

CPP Timing. As of January 1, 2012, eligible Canadianscan start receiving Canada Pension Plan (CPP) paymentsas soon as they turn 60, and no longer have to cease work-ing. Of course, CPP can still be taken at the “normal” ageof 65, or delayed up to age 70. Those who elect to begintaking their CPP payments early will be subject to a reduc-tion, and those who postpone will enjoy an increased rate.This begs the question, “What’s the best age to start draw-ing CPP?”

Life Insurance.Most clients will require life insuranceat some point in their lives. However, deciding on anappropriate policy and level of protection is far from anexact science. Term policies are definitely cheaper today,but over the long run, permanent plans can prove evenless expensive. Whether it’s term or permanent, or ablended plan such as a universal life (UL) policy with aterm rider, insurance protection can be secured in manydifferent forms.The recommendations pertaining to these concerns,

as well as many others, will be specific not only to eachindividual client but also those offering the advice. Keepin mind that different advisors — with the same creden-tials and training, and perhaps even working in the sameoffice for the same company — can analyze the sameclient and yet come to a different set of recommenda-tions. Why? As we’ll see, in many cases it’s not necessar-ily a right or wrong decision, but, rather, that they havedifferent ways of achieving the same objectives.To explore some different strategies and products advi-

sors use to tackle common retirement planning concerns,FORUM spoke with three financial advisors to get theirfeedback on a baby boomer client couple.Let’s meet the Sarlos.

ichael Sarlo, age 63, has recently retiredfrom the workforce and is enjoying hisnewfound freedom in retirement.Michael was a self-employed carpenterby trade and has no employer pension.His wife, Malena, age 61, is retiring thismonth from her position at the NatureConservancy where she is a biologist.

Now that Malena is retiring too, the Sarlos are really looking for-ward to making the most of their retirement together.Michael has a non-registered portfolio of $153,000 and an

RRSP balance of $387,000. Malena’s RRSP is $82,000 and her non-registered portfolio is $121,000. In addition to her personal sav-ings, Malena also has a defined benefit employer pension planwhich pays $34,772 annually, indexed to inflation (as measuredby CPI). Both Michael and Malena are non-smokers.The Sarlos have two children: Noah and Ethan. Both have

graduated from university, have secure jobs, and have moved outof Michael and Malena’s home. Noah and Ethan are no longerfinancially dependent on their parents. However, both Michaeland Malena agree that they would like to set aside some moneyfor their children, either as an inheritance when they pass, or per-haps to help fund the costs of post-secondary education shouldNoah and/or Ethan have children of their own.Michael and Malena own a house in the city as well as a cot-

tage on a lake about an hour’s drive from their home. Both prop-erties are mortgage-free — the cottage has a fair market value of$150,000 (purchased for $50,000) and the house is currently worth$330,000 (purchased for $105,000). They have no plans to selleither property and would like to live in their home as long as pos-sible, and ultimately leave the cottage to the children.Neither Michael nor Malena are currently receiving CPP pay-

ments; they are wondering if they should start as soon as possible

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or wait until age 65 or perhaps even later. They desire a combinedhousehold annual income of $50,000 after-tax (indexed to infla-tion) but have no idea how their portfolios should be designedto generate the necessary income. They have no insurance out-side of Malena’s group plan, which will cease upon her retirementthis month.

CommentaryNote that the advice pertaining to the Sarlos could develop intothousands of words, and pages and pages of complex financialplans exploring different options; but in the interest of time andspace, we’ve asked our industry professionals to comment on afew key points, including:• income generation and portfolio construction — products, allocation, rates of withdrawal, etc;

• CPP timing decision — now, at 65, or later;• tax and estate considerations; and• insurance needs and potential solutions.Let’s see what our panel of advisors had to say …

… About InsuranceAndrew Guilfoyle, CA, CFA: I don’t see a definite need forMichael and Malena to have life insurance. It could certainly proveuseful, but it’s not critical to them achieving their financial goals.The three possible uses for life insurance would be for final

arrangements and expenses, capital gains on the cottage, and tocover off the tax on the RRSP, which will eventually be turned intoa RRIF. It’s important to note they would be paying out of person-al funds so there is no capital dividend account tax advantage. Theyare not eliminating any of these expenses; they would simply be pre-paying them and ensuring liquidity at the time of their passing.

Teresa Black Hughes, CFP, R.F.P., CLU, FMA, CIM: Insuranceis not necessary in order for the cottage to be passed on to theirchildren, nor is it a necessity for providing or preserving cashflow for the surviving spouse. But insurance could play otherroles in their planning.

CASESTUDYADVISORY

PANELMeet the advisors:Teresa Black Hughes, CFP, R.F.P., CLU, FMA, CIM, is a financial advisor with Rogers Group Financial in Vancouver

Bob Challis, CFP, RHU, TEP, is a financial advisor andfounding owner of Nakamun Financial Solutions in Winnipeg

Andrew Guilfoyle, CA, CFA, is a financial advisor andpartner with Guilfoyle Financial in Toronto

CASE STUDY: Michael and Malena Sarlo

M

Since the Sarlos have sufficient after-tax income to meet theirneeds, they could use some of the excess cash flow to pay for aninsurance policy to benefit charity, if they were so inclined. Forexample, they could diversify some of the investment capital intoa life annuity in about 10 years’ time, and ensure return of thecapital to the final estate via a life insurance policy. Alternatively,they could arrange funding via a charitable annuity. [In any case],the point is that insurance, while not necessary, could be used toenhance [the value of] their estate or facilitate charitable giving.

Bob Challis, CFP, RHU, TEP: While the Sarlos may not havea specific need, certain forms of life insurance act as a very efficientshelter from investment taxation, can convert deferred earnings tonon-taxable payments, and can offer predictable dividend rates oncash values, which are currently in the four- to seven-per-centrange. Given that Michael and Malena appear to have excess cap-

ital and income to their current and future security needs, and noneed for high-risk investments, they are ideal candidates to bene-fit from these unique features.

AG: If they were to secure life insurance protection, the poli-cy should definitely be a permanent plan. In order to manage thetaxes ultimately owing on the cottage or RRSPs, a joint second-to-die policy can be used to lower costs, as this is when the tax billwill come due. A universal life policy will have lower annual costs,but if they feel healthy, have a decent life expectancy and a posi-tive cash flow, they may want to consider a whole life policy. Thiscould give them a safety net of cash values to be accessed well intotheir 80s or 90s.

One final insurance consideration should be a long-term carepolicy. One of the greatest financial risks would be that one or bothof them suffers a severe long-term illness, such as Alzheimer’s, andrequires ongoing assisted living, which can be quite costly.

… About CPPTBH: If Malena took CPP now, at age 61, she would see a reduc-tion of $246 per month, advancing $35,500 before age 65. Thebreak-even point is age 77. Michael’s CPP would be reduced by$123 per month if he was to begin taking payments now at age 63,advancing $20,724 before age 65. The break-even point for Michaelis age 79. I recommend they collect CPP immediately, with the viewthat a bird in the hand is better than two in the bush.

BC: We used our planning software to establish a baseline meas-urement for Michael and Malena, and then ran a few “what if” type

While many advisors often target business owners, doctors,and other professionals aspotential clients, they shouldn’toverlook the absolutely massiveamount of wealth that resideswith boomers.

p24-29 Advising Boomers SEPT2012_3_SEPT 2012 12-08-17 4:27 PM Page 27

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scenarios on such decisions as triggering CPP and RRIF paymentsnow or later. In short, the Sarlos are in great financial shape andshould be able to generate the income they desire, leave the cottageto Ethan and Noah, and an inheritance to the kids and/or grandkids.As for CPP and RRIF timing, we found that the overall estate val-

ues increased dramatically based on a few variables. Consequently,we would recommend waiting until age 65 for CPP, and age 72 forRRIF payments. However, pension splitting and maximizing TFSAcontributions should begin immediately. According to our calcula-tions, this yielded the best overall results.

… About Generating IncomeBC: In regards to generating income for the Sarlos, I’d recommendsupplementing Malena’s pension income with withdrawals fromnon-registered investment portfolios until CPP and Old Age Security(OAS) payments begin. They have no real need to take an aggressivestance. They can invest conservatively, with a view to tax efficiencyand capital preservation. They should consider using corporate classand/or blue chip dividend investment funds with an option for cap-ital only withdrawals, and investment funds offering a 100 per cent

28 FORUM SEPTEMBER 2012

RETIREMENT PLANNING

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CASESTUDY

capital return guarantee and a growth lock-in or reset feature.Additionally, I’d recommend they minimize market risk by main-taining a “cash wedge” strategy at all times, and place longer-termoriented assets in their TFSA accounts.

AG: In a low-return environment, their RRSPs balances willlikely decline once they’re turned into RRIFs and the Sarlos areforced into minimum withdrawals. While the RRSP/RRIFaccounts can be rolled over to each other on a tax-deferred basisupon the first spouse passing, 100 per cent of the remaining

SEPTEMBER 2012 FORUM 29

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balance will be taxable as regular income upon the second death.It should also be recognized that the RRSPs would currentlyattract significant tax should both Michael and Malena pass awayin the near future.

TBH: For the Sarlos’s investment portfolios, I’d recommendan overall 60/40 fixed income/equities split across all accounts.However, the mix can be managed such that the greatest portionof the equities weighting is held in their non-registered accounts.Also, Michael and Malena should take advantage of tax-savingsopportunities and maximize their TFSA contributions.While I won’t comment on particular stocks or products, I’ll

make a few high-level recommendations. I’ve indicated that themajority of their assets would be invested in fixed income, but theyshouldn’t overlook growth opportunities for a small portion of port-folio, such as emerging markets or U.S.-based securities. Also, theycan build some risk protection into their portfolios with tangibleassets such as real estate and gold, and inflation protection with realreturn bonds. And while Canada is still a great place to invest, theyshould include quality global bonds in their fixed income holdings.

… About Estate ConsiderationsAG: If the cottage is eventually sold or transferred to Noah andEthan, there will likely be significant tax owing due to the appre-ciation of the property and associated capital gain. While payingthe tax bill may not pose a huge problem, it would be importantto have a conversation with Michael and Malena about how like-ly it is that Noah and Ethan would want to share the cottage mov-

ing forward. In time, that conversation could also happen if andwhen the sons marry. One question to consider is: Will the fourof them get along well enough to share the cottage? Also, if sig-nificant renovations have been done to increase the value, thenreceipts should be maintained to increase the adjusted cost base(ACB) over and above the purchase price.

Different strokes for different folksWhile some advisors argue that as boomers near retirement theywill become more conservative with their investments and avoidstock-market-based equity investment, others believe that as lifeexpectancy increases, boomers should maintain adequate equityexposure to preserve their purchasing power and stave off infla-tion. Decisions around establishing an appropriate asset mix,deciding on when to commence CPP payments or convert RRSPsto RRIFs, and how to effectively transfer the family cottage to thenext generation are all great ways advisors can demonstrate theirvalue and continue to strengthen relationships with their clients.Helping boomers transition into retirement — and working withthem throughout their retirement years — is perhaps one of thehighest callings of the financial advisory profession. �

MICHAEL CALLAHAN can be reached at Callahan_michael@yahoo.com. If you would like a PDF of this article, please email FORUM editor KristinDoucet at kdoucet@advocis.ca.