How retirees can make up for a shortfall if they can’t work

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Pre-retirees are often shocked when they first realize how much they need to save now to enjoy a comfortable standard of living later.

For those who only start planning in their 40s or 50s, that amount can be well north of $1,000 to $2,000 a month, says Frank De Lio, senior executive director and financial advisor at Experior Financial Group Inc. in Richmond Hill, Ontario.

“The knee-jerk reaction to this sticker shock is often the belief that their only option is to work longer to retire — or never be able to retire at all,” he says.

The overwhelming feeling that many clients feel at the start of the retirement planning process is one explanation for recent findings in the 2022 Fidelity Retirement Report. While the survey found that 60% of pre-retirees plan to work to some degree in retirement, only 17% of retirees actually do at least some part-time work.

So why do less than a fifth of retirees follow their work plans?

Betty-Anne Howard, Financial Advisor and Certified Financial Planner (CFP) at Assante Financial Management Ltd. in Kingston, Ont., says most of his clients quickly realized it “just wasn’t worth it” and found ways to cut expenses and live on less income instead.

Many find they prefer volunteer work and support for charities and nonprofits over taking on often low-paying and high-stress jobs, she says.

“They’re not really interested in going back to what they were doing and want something else in their lives to give them purpose and meaning, even if it doesn’t make money,” Ms Howard says.

She will often refer pre-retired clients to resources such as government-funded placement agencies to explore the type of work they might be interested in doing more of. It can also serve as a much-needed reality check to find out what jobs are actually available, she says.

Other contributors to non-working retirees include disabilities and health conditions that increase with age, says Jason De Thomasis, CFP at De Thomas Wealth Management in Richmond Hill, Ont.

“When we’re young, we don’t think we’ll ever need long-term care or have a disability, but the statistics say otherwise,” says De Thomasis.

“Reviewing and implementing potential critical insurance and disability insurance options should always be part of discussions with clients, especially when they are younger and able to qualify at a much higher rate. more affordable.”

Adopting the “bucket approach”

Mr. De Thomasis urges clients to develop a solid holistic financial plan that focuses on more than just investment returns and considers scenarios beyond not being able to find work after retirement. These include stock market crashes, large unforeseen expenses, the premature death of a spouse, a prolonged decline in income, and prolonged high inflation.

“A lot of people think they have a retirement plan, but in reality they only have money in the stock market, like stocks or mutual funds. It’s a huge problem,” he says, pointing to the impact of the sequence of returns on retiree portfolios, and which most people use as a gauge, which have been overwhelmingly positive over the past 10 years.

“When you show a client a 5% annualized return over a 10-year period with regular withdrawals, a difference in the sequence of returns can either extend the portfolio another 10 years or nullify it,” he says. .

When reviewing the investment component of a pension plan, De Thomasis takes a tranched approach.

“It’s not groundbreaking, but it’s a prudent method to help clients meet their income needs and not be negatively affected by volatile markets, like what we saw in 2022,” says- he.

“Advisors and planners should not use long-term averages as a guide for retirement investment decisions.”

Other options to consider

When retirement planning projections show a client won’t meet their goal, Scott Sather, president and CFP at Awaken Wealth Management Ltd. in Regina, discusses four ways to achieve these goals – save more, earn more, wait or take less.

Earning more is the option that always looks good on paper, allowing retirement savings or pensions to grow for a few more years while clients continue to work.

“Sometimes they see their spouse or friends enjoying retirement and choose the ‘take less’ option instead, adjusting their lifestyle needs to accommodate, or in some cases just starting to retire and hope for the best,” says Sather.

Retiring from a career with the highest income in their life to accept a generally much lower income is not the most attractive option, but age and lifestyle will also play into their decision, says- he.

Those who choose to retire between the ages of 55 and 65 are more likely to continue working to some degree, as are business owners and professionals like doctors or lawyers. An avid golfer may choose to work at the clubhouse to offset some of these expenses while enjoying the game.

When retirement plans that include work don’t materialize, De Lio advises his clients to downsize their homes to make up for the shortfall.

“We have successfully shown pre-retirees how downsizing or using a reverse mortgage can help generate cash in retirement without jeopardizing their estate, so they can still leave something behind for their children or grandchildren,” he says.

With house prices still at high levels, Mr De Lio has also seen more adult children returning home with their retired parents.

“They help pay for expenses like groceries and utilities, and in return, they live without having to pay rent or a mortgage,” he says. “This could be another reason why fewer pre-retirees end up working in retirement.”

Whichever option clients choose, having a proper financial plan that focuses on all areas — investments, taxes, cash flow, insurance, health and estate — is key to success, says De Thomasis.

“When clients are aware of the pitfalls and have a plan in place that they understand, they can enter retreat with ‘eyes wide open’ and make necessary adjustments as needed,” he says.

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