Adapting for Life

This five-part series of articles highlights the importance of having a financial plan, and how an advisor can help you be prepared for market corrections, as well as all the big events in your life.  In Part 2, we look at some common milestones and risk-tolerance changes at various points in life and how these can affect decisions you make about your investment portfolio.

The economic impacts of the COVID pandemic – roller-coaster stock markets, job losses, struggling businesses – have left many Canadians concerned about their financial security. The world crisis has reinforced the importance, at any age, of having a detailed financial plan that can help you realize your dreams and retire comfortably.

A financial plan can be as simple as spreadsheet set up to help you pay off university debt or save for a down payment on a home. However, you may want to consider drawing up a more complex, formal document with a financial planner once you’ve been working for a while, are making a good salary and your life goals start changing. It also makes sense to have $100,000 or more in investible assets if you are going to be paying a service fee.

Typically, financial planners work with mass-affluent individuals who have between $100,000 and $1.5 million to invest, but the lower end is not a hard and fast rule, says Tonya Campbell, Regional Vice President, Central Canada Mobile Advice Team at Scotiabank. She cites the example of a physician, who has less than $100,000 to invest but has just paid off student debt and will be accumulating money quickly, as someone she would put in a plan.

There’s also no set age at which to set up a plan. Planners have been seeing more people come to them at the Baby Boomer and X generations move closer to or are in retirement, but they are also seeing the children of Generation X, many of whom are in their mid-30s.

While Campbell emphasises that every client’s story is unique, she does acknowledge there are some key life events likely to occur in a certain age group that can trigger changes to your goals originally set out in the plan, and ultimately to your investment portfolio. Being aware of these can prepare you for any decisions you will need to make to keep your plan on track.

Typically, people begin to think about financial planning around 35 to 40 years old. “By 35, people really shift from debt reduction to asset accumulation,” Campbell explains. That means many have paid off student loans, bought a first home and have car loans. Typically, they have worked for 10 or more years and have seen their income rise with experience. What they now want to know is how to make an extra $100 or $200 a month help them reach their life goals. Do they pay down debt or invest and watch their money grow?

Milestones: While it’s recommended you revisit your plan annually, at the very least you need to do so if you experience any major event that is not factored into your plan. “You may not think of an illness diagnosis as a financial decision, but it almost always is,” Campbell says. So too are having children, getting married or divorced, taking care of an ill parent, or a job change or loss, among other things.

Risk tolerance: Education, objectives, income levels, time horizon all play factors in risk. What you need to realize is the younger you are the more time you have to recover from a major market event, making it the ideal time to hold investments with higher returns and risk. Still, time is only one factor. Your risk tolerance can also be affected by your parents’ reaction to past events. For example, the Baby Boomers’ parents lived through wartime, and the unusually high interest rates of the 1980s, which made them very cautious about investments. In turn, Gen-Xers children are experiencing their parents caution after losing money in the dot.com crash, or housing bubble.

With retirement looming on the horizon, in their 50s and 60s, people start to ask themselves at what age they want to stop working and how long they need to work to retire comfortably. “This is where your financial plan really helps,” Campbell says. If you planned to retire at 65, for example, and now 55 looks like a better option, having a plan lets you determine what that means for your lifestyle. Do you work longer and have more for travel or hobbies in retirement, or do you retire earlier, scale back and live a simpler life. “You are making conscious decisions about trade-offs to support the things that are important to you,” she says.

Milestones: Illness, death of a spouse or parents and taking care of ailing parents happen at a higher frequency at this stage. It’s also when people start to worry more about how a long-term illnesses or incapacity could affect their plans later on. “Maybe you are inheriting money from a parent that you want to invest, or it could go the other way where you were taking care of an ill parent for a long time and your funds were depleted,” Campbell says. Often it isn’t the actual portfolio this age group is concerned about, rather it's the things that will impact the portfolio at some other point. If something is worrying you, Campbell recommends revisiting your plan to build in some “what if” scenarios.

Risk tolerance: The stakes are getting higher as you near retirement, so while you know what to expect in the market and your risk tolerance is honed, now is a good time to de-risk a small portion of your portfolio for when you start to draw on it, particularly if you want to retire earlier than planned. If you have a diversified portfolio with a good portion of it in equities, you’ll need to move some money into more liquid investments such as high-interest savings accounts and GICs with terms aligned with time of need to be less exposed to major market fluctuations. “The majority of assets are usually planned to be held for 20, 30 or even 40 years, depending on life expectancy. Only the funds that need to be used in the short term — say less than three years — need to have risk reduced,” Campbell says.

Divorce rates above 50% and blended families are muddling decisions about how any remaining assets in your portfolio will be divided after death. You may want money to go to some children and not others, or you may want to gift money during your lifetime. “This is what people worry about at this stage, how to ensure the money goes where they want it to,” Campbell says, noting this is an important time to visit your financial planner and get connected to somebody who is an expert in legacy planning.

Milestones: This is when many people start to draw down on their portfolio. There is no avoiding the mandated minimum annual withdrawal from your registered retirement income funds (RRIF), once you turn 72, or the year after setup if you transfer your registered retirement savings plans (RRSPs) before you are 71 years old. One caveat this year is that the minimum required withdrawal for all types of RRIFs has been reduced by 25% to offset the effect of market fluctuations on portfolios so be careful not to overdraw. Some people look to make withdrawals in the most tax-efficient way, others choose to spend the money doing the things they enjoy, whatever the tax costs.

“Hopefully, you’ve saved that money when you were being taxed at a higher rate and now when you're actually drawing on it, it’s at a lower rate, and one way or the other you’ve benefited from that tax shelter while growing your assets,” Campbell says.

Risk tolerance: Time horizon is getting shorter so a lot of the risk inside your portfolio will have already been reduced. However, risk tolerance is unique to the person and there are people who can’t bear the thought of losing any of their original nest egg. “I’ve seen many clients who say, ‘let’s go for as much return as we can, I want to make sure I can pass as much down as possible to my benefactors’,” Campbell says.

Generational Shift
Snapshot of the retirement expectations for the four generations considering or in financial plans

MILLENNIALS (Ages 18-34)

• 62% currently saving for retirement
• Expect to need an average of $704,000 to fund their ideal retirement
• Average age of expected retirement – 62 years
• Millennials are more focused on prioritizing travel and spending time with family/friends in retirement than older generations
• One in five millennials feel very comfortable they are on track to meet their retirement goals (21%)

GENERATION X (Ages 35-54)

• 74% currently saving for retirement
• Expect to need an average of $768,000 to fund their ideal retirement.
• Average age of expected retirement – 64 years
• Gen Xers view travel and maintaining a comfortable lifestyle as their number one priority in retirement
• Less than 1-in-5 Gen Xers feel very comfortable they are on track to achieve their retirement goals (12%)

BOOMERS (Ages 55+)

• 64% currently saving for retirement
• Expect to need an average of $572,000 to fund their ideal retirement.
• Average age of expected retirement – 66 years
• Boomers are significantly more likely to prioritize keeping healthy as their number one goal in retirement
• One-in-four Boomers feel very comfortable they are on track

The 2019 Scotiabank Investment Poll was conducted by Nielsen Consumer Insights between January 25 and February 3, 2019. A total of 1,012 completed surveys were collected from a random sample of panel members across Canada.