Gordon Powers

Two thirds of Canadians nearing retirement worry about depleting their savings too soon, but few are doing much to prevent that from happening, according to a survey for the Canadian Institute of Actuaries.

Ask someone how they're going to replace their work income and, unless they're in line to receive one of those increasingly elusive guaranteed pensions, you'll get a blank stare or a sheepish "I don't really know."

What's worse, many of the people they turn to for advice aren't giving them the help they really need either, suggests a recent Russell Investments research paper aimed specifically at financial advisors.

Advisors are trained to gather assets and keep their clients happy. Other than a handful of true fee-only planners, most of them are salespeople.

Sure, the firms they work for will encourage them to create a sound investment plan for you. But, if they focus all their attention on providing detailed financial planning advice then they'll miss their performance targets and be chastised accordingly, thus making comprehensive retirement planning a low-level activity with many clients.

Truth is, many advisors don't actually have a lot of hands-on experience helping older individuals meet their retirement income needs. That's a problem since most of them are going to find their client rosters dominated by worried retirees grappling with a brand new set of financial priorities.

More and more baby boomers are beginning to enter the "de-accumulation" phase of their lives, in which they'll start dipping into the money they've squirreled away over the course of their working years. For many, that means confronting a period that's both difficult to visualize and understand.

Forty years ago, someone retiring at age 65 could expect to live roughly 13 years in retirement. Now, if you're healthy, you can expect to live another 20 years, and both you and a few of your friends could live for another 30 years or more.

During that time, most of you will likely see the size of your assets shrink gradually and will need lots of help if you're to avoid running out of money entirely.

But, to provide that help, advisors will have to shift from an asset-only view of portfolio management to a broader approach that hinges upon a single surplus or shortage number that determines spending needs and retirement readiness, Russell maintains.

To accomplish this, instead of simply spreading money among stocks and bonds and using occasional withdrawals to create retirement income, Russell believes advisors need to view those assets in terms of how they can take the edge off the three main issues facing retirees.

"Retirees consistently express three primary needs concerning retirement wealth management," explain authors Sam Pittman and Rod Greenshields. "They want low risk of outliving their assets [sustainability], consistent income [predictability], and financial flexibility [liquidity]."

To answer these concerns, they believe client conversations should shift from investment returns and performance to managing successful outcomes. As a result, when constructing a retirement plan, advisors should focus more on a client's retirement liabilities and less on the size of their portfolio.

That ratio of assets to liabilities, the funded ratio, helps prospective retirees make informed decisions about how much to spend — and whether they're truly ready to leave work.

A funded ratio is a point-in-time measurement of your nest egg's ability to handle the future distributions you're going to need.

A ratio of 100 per cent or above means that, at that particular point in time at least, you're in good shape. A ratio under 100 per cent is a telling sign that the money you've put aside is likely to come up short.

This "adaptive investing" process helps both advisors and clients manage longevity risk, while providing retirees with a predictable income stream without necessarily locking their capital up in an annuity, the report suggests.

It's not that annuities are "bad," it's just that they're so absolute. Most people look on them as a gamble, in which you have to live a certain number of years just to break even.

While annuities are useful for addressing a longer-than-anticipated life and matching fixed expenses with income, they won't protect against other risks such as escalating health care costs or inflation. They also do little for those who need some liquidity or want to leave a substantial estate.

If all this seems a bit esoteric, here's a simple five-question, two-word rubric from one of Robert Laura's Retirement Readiness workshops:

1) How Much?
2) How Often?
3) How Safe?
4) How Consistent?
5) How Flexible?

Ask your advisor what he or she has in mind when it comes to building and sustaining retirement income.