Speaker Key:
GS Gregory Sweet
DD Daryl Diamond
VO Voiceover
00:00:00
GS When people think about retirement, they often think about one big question: how much do I need? Retirement today looks very different than it did even a generation ago. And increasingly, it’s less about hitting a magic number and more about building income that can actually last.
Welcome back to Let’s Talk Investing. I’m your host, Greg Sweet. To help us unpack how retirement is changing and how Canadians should think about retirement income, I’m really excited to have Daryl Diamond, Chief Retirement Income Strategist with me today.
Daryl is one of Canada’s leading voices in retirement income planning. He’s been in the industry for more than 40 years. He’s spent much of that time helping Canadians turn their savings into steady, sustainable income. He’s also a best-selling author, and you’ve likely seen him on CP24 or BNN Bloomberg sharing his insights on building retirement income that lasts. Daryl, thanks for joining me today.
00:00:53
DD Thanks for the invitation to chat about this very important topic.
00:00:58
GS All right, let’s get into it. Before we get into the specifics, at a high level, what feels most different about retirement today compared to when most people’s parents retired?
00:01:06
DD In today’s retirement, there are different planning strategies, different investment strategies, and there are also some significant risk management issues compared to when our parents retired. The transition from our accumulation years to our income years is an altogether art and science.Current retirees and pre-retirees have the potential for a significantly longer life expectancy than previous generations. Someone retiring now should be looking at the possibility of up to 25 or 30 years of retirement. That is a long period of time for personal assets to fund an income. And that leads me to this: today, defined benefit pensions are rarely found outside of the plans provided for government employees. And what was special about these types of pensions, and why they were preferred by employees, is that you know what the amount of monthly income is that you’re going to be paid when you retire. Now, combine that knowledge with, let's say, CPP retirement pension and OAS income, and as a retiree, you had a pretty good idea of what your pre-tax income was going to be. They knew the income, and they adjusted their budget to fit within what they were being paid. If you’re still working, that’s basically what you do now. While CPP and OAS give us an income figure with which to work as we approach our retirement, and if we're not in a defined benefit pension, that means we need to make withdrawals from the personal assets that we have in order to provide the additional income in retirement that we are going to need.
00:02:54
GS So we’re talking about a 25, 30, even longer years in retirement. That’s a great news story. You know, we’ve historically talked about, you know, having your home paid off, but, you know, a paid-off home doesn’t necessarily generate an income for a client. And interest rates alone haven't really done the heavy lifting as of recent that they once did for our clients. So how do we think through that risk of being maybe too conservative in our income approach?
00:03:21
DD It’s common—in fact, it's expected—that risk tolerance for people as they move through their retirement becomes lower, and that’s understandable. They don't want to be dealing with volatility or down markets. But there is the other side of that, and that’s the potential of having your retirement savings erode because you’re too cautious. And let me give you an example of how that’s a possibility, because that sounds rather odd, but you can erode your retirement income assets by being too cautious. Imagine instead of having investments, that your income was being produced by the apples you sold at the apple orchard that you owned. That’s what you have instead of invested assets: an orchard. And each year, you produce the same number of apples and everything’s going along nicely. And now, either due to inflation or other circumstances, you need to increase your income and you go, "Well, gosh, I relied just solely on the apples to produce what I need for my retirement. But now I need more than I can derive from the apples alone. So I know what I’ll do: I’ll cut down a few of the trees and sell them for firewood, and that’ll supplement my income from the apples." And that’s fine in year one. But now next year, you’ve got fewer trees to grow the apples that were used for the base of your income. And if you see this unfolding repeatedly like that year after year, you can see where being too conservative in a low interest rate environment means that you’re using more of your capital, which is producing that interest, to reach the income that you desire. And over 5, 10, 15 years even, that can have a really detrimental effect on the value of your income-producing accounts.
00:05:10
GS Makes sense. You’d have no trees left in the orchard.
00:05:12
DD No.
00:05:16
GS So it's not just a longer retirement; it’s actually a very different income picture, which brings us to something that a lot of people don’t think about until they’re right up against retirement, and that’s shifting from one paycheck to many. So, given that this is one of the biggest shifts people face in retirement—the notion of moving from one paycheck during their working years to many paychecks or many income sources in the retirement years—why is this such a challenging concept?
00:05:42
DD It’s challenging because, as you mentioned, you’ve got a number of different income streams, different sources from which withdrawals can be made: Canada Pension, OAS, pension income possibly, income from your registered retirement income fund or life income fund, and so on and so forth. And what's interesting about that fact is that these various forms of income have different rules, different restrictions, different various forms of taxation. So the question becomes, well, how do I combine all of these in order to have tax-efficient income throughout my retirement years? What do I use? What do I choose to defer? How much should I be withdrawing from each account that I have? And realize that the answer is going to vary from household to household. There's not just one way to do this because every situation is different.
00:06:40
GS Makes sense. Okay, so we have to do this coordination work: CPP, OAS, RIFs, TFSAs, maybe it’s the pension you spoke about, maybe it’s part-time work, and the timing of all of this matters. So once these income streams are in place, the next big question is: how do we make it last for 25, 30, or even more years?
00:07:02
DD Well, if you’re talking about sustaining income, there are a whole bunch of different factors that can be considered. And you just struck upon what is probably the number one concern for anyone approaching retirement or even in retirement: they don’t want to outlive their income, and appropriately so. So from an advisory perspective, we’ll get directions from people saying, "Look, I’ve got the health and the interest in doing all these things on this list in my first ten years of retirement, and we want you to help us make sure we have a chance to do them by funding them." And before they finish the sentence, they quickly add, "We want you to do that, but also make sure that we do not run out of income."
And those two objectives, as you might imagine, are relatively conflicting. But that's the dual interest or the conflicting interest that retirees have: do what they want to do, but not run out of money. And that can be a challenge because we don’t know how long people will stay healthy; we don’t know how long they’re going to live.
00:08:12
GS Yeah, certainly a delicate balance there.
00:08:15
DD Yeah.
00:08:17
GS So what I’m hearing, Daryl, is it’s probably a really important time to be talking to an advisor and really putting that plan in place.
00:08:22
DD Right. You know, we have the Olympics coming up, and there’s the sledding races, the bobsled race in particular. There’s a point in time where, if you will, the timer starts, and you’ve got four crew members sprinting down a 50-meter track, and they hop into the sled after that 50 meters. That’s called the push start.
And for people who are experts in that sport, they say that 50-meter starting run really determines in most cases how those people are going to finish. But it’s emphasizing how critical an efficient start is. And it works the same way in retirement income planning, both in structure and factors like starting early will help us to have a better opportunity of sustaining capital and the income that we need.
00:09:15
GS When we’re thinking about sustainable income over decades, maybe what are some of the biggest risks people tend to underestimate? You know, a couple of things that come to mind for me is inflation doesn't stop because you’ve retired, right? We need to take that into consideration and ensure the value of our dollar still stretches as far as it once did.
00:09:32
DD You’re so correct. That’s such an important factor and it’s kind of insidious in that sometimes it’s relatively hidden and small, as we went through in the 2010 years. And then we hit 2021 and we’re looking at a year with almost a 7% inflation rate. So it is a factor that, irrespective of how carefully you plan throughout your accumulation years, how carefully you plan at the start of the delivery of your retirement income, we don’t know how inflation’s going to fall out down the road. And we’ve had just a very, very interesting experience over the last five or six years on how nasty inflation can be and how it can impact your cash flow. And it’s a serious consideration for retirees.
00:10:22
GS The other one I think about is healthcare costs. Like, great news, we’re all living longer and, you know, for those of us that can enjoy those retirement years, it’s fantastic. But reality is healthcare costs tend to go up later in life as well. How do you incorporate that in your process?
00:10:34
DD We are, in fact, living longer, but the years in which we retain our good health are not keeping pace with those extra years of longevity. So health-related costs can be on a pretty dramatic scale or minor, but it's still a cost that we don’t necessarily think through carefully at the outset because we just don't know when and we don’t know how much is going to be required as things change in our health as we move out there on the age curve.
00:11:05
GS Those are valuable insights. When I think about many Canadians, they think about, "Well, I’m going to spend a little bit more money early in my retirement, and I won’t be traveling as much or being extravagant with my purchases later in life," but those healthcare costs become a bigger component of that cash flow requirement.
00:11:21
DD Yep.
00:11:22
GS I guess the other reality is that markets don’t move in a straight line, especially over a 25 or a 30-year period.
00:11:29
DD And that’s very true. It’s one of the reasons why, in terms of setting up your plan and in terms of aligning an investment strategy or investment strategies for the assets you have producing your income, you want to have a level of flexibility in how everything is going to flow. Flexibility allows you to basically navigate the changes you’re going to have in retirement. Volatile markets are one thing; changes in health are another thing. A lot of these are unknown and come out of the blue. And to have some flexibility in your structure and your investment strategies allows you to navigate this in a much more efficient manner. And that’s one thing that I think doesn’t get the type of attention that it needs or deserves, but it's all part of the planning and the investment process.
00:12:20
GS So it’s about building and setting in place a sustainable income strategy, accounting for the unknowns and making sure that that plan has ample flexibility to adjust, you know, as life does its normal thing—you know, expect the unexpected.
00:12:36
DD Those are all key variables. And again, coming right back to it, as we talked about previously, best implemented and discussed at the very outset of retirement. Obviously, there’ll be changes over a 25-month period, let alone a 25-year period. There'll be changes that come along the way, but that’s why having someone to work with is much more valuable at this juncture in your life than, in my opinion, at any other point in time.
00:13:05
GS We also know that in retirement there’s some real tradeoffs that people need to consider, right? It’s the "would you rather" scenarios. So maybe I could just take you through a couple of the ones that, you know, I think about when we talk to our advisors and we talk to our clients. The first one is, like, would you rather retire earlier with a little less lifestyle flexibility later on, or would you like to work a few more years with more freedom in retirement? How do you think about that, Daryl?
00:13:28
DD First of all, you’re very correct. Pretty much like any other time in one’s life, really when you think about it, every decision involves a tradeoff of one sort or another. I have a little mantra in trying to encourage people to be careful in what they’re doing as the time to retire. And it’s simply this: don’t rush it. It’s not about retiring early; it’s about retiring surely and securely. In that way, it’s going to be a much more fulfilling experience.
00:14:00
GS Surely and securely. I love that. That’s great.
00:14:02
DD Right.
00:14:06
GS The other one is, would you rather save a little more now or potentially have to cut back later? So it’s that idea around, you know, gratification of cash flow today versus maybe preparing a little bit more for tomorrow.
00:14:16
DD I would always err on the side of having more income than I need in retirement than face the many complications that come to the surface if you don’t have enough.
00:14:28
GS All right, so each one of these decisions really shapes how you’re going to build your retirement income, but also the flexibility that you’re going to maintain in that plan down the road. And "plan" being probably the operative word there. There's no right answer; I think for everybody it’s individual. It's really just about thinking it through: what are you looking to achieve, and what do I need to understand today to put the right steps in place for down the road?
00:14:50
DD Absolutely. And remember that as careful and correct as we may be at the outset of putting all this planning work and investment alignment work into the efforts of making this work properly, it is going to change. It’s a moving target, and that’s what makes it a full-contact sport in the context of the relationship you have with someone helping you on the advisory side.
00:15:13
GS Daryl, any final words before we move into our close?
00:15:18
DD We’ve seen a lot of people in retirement over the years that we were at one time working in our financial advisory practice do a tremendous number of wonderful things during their retirement years. And it only got accomplished, in my opinion, because we worked out what it was they wanted to do, when they wanted to do it, what it was going to cost to do it, and built that all into a roadmap for them to follow. And those proved to be very successful retirements, and I hope that that is what listeners have the opportunity to do and really make their retirement years the most rewarding period of their life..
00:16:00
GS That's beautiful. You know, when we started our conversation today, we had a purpose: it was really understanding retirement planning isn't about hitting that magic number; it's about building an income that can last the 25, 30, 30-plus years of retirement. When I think back to our conversation, we discussed: the landscape has changed; income will come from multiple sources that need to be coordinated. For many Canadians approaching retirement, this is really the time to start considering consolidating those assets into one place to really simplify that transition into retirement. There's a number of factors that we need to consider and plan for to build that sustainable income, and a number of real tradeoffs that we need to think through fully. My big takeaway from this conversation is that building sustainable retirement income requires thinking differently and really putting the pieces together with a planner, with an advisor, so that you have a plan that sets you up for success. Good news is you don’t have to figure all this stuff out alone. Meet with a Scotiabank advisor who can help you build a tailored retirement income plan that’s right for you. Here at Scotiabank, we’re committed to supporting our clients for every future.
00:17:02
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