What strategies for your retired and pre-retired clients?

The pre-retired are not facing exactly the same challenges during this time of crisis as are retirees. Pre-retired clients are still amassing resources and their main source of income is employment. However, some of them will see their jobs disappear, at least temporarily.

Managing a lack of cashflow

“People who don’t have emergency funds may run out of cash very quickly,” notes financial planner at SFL Wealth Management. The natural reflex for many of them is to withdraw money from their RRSP.

But this may not be the best idea, since securities have lost a great deal of value. Moreover, the Chambre recommends that you remind clients that this crisis will end and it shouldn’t, alone, be a reason to modify their portfolios.

Micheline B. Soucy, financial planner and tax specialist at Whitemont, suggests starting with a review of their budget and cutting expenses. Certain options, such as renegotiating the mortgage (if lowered interest rates make it beneficial), can be explored. If money does have to be withdrawn, it is better to first look at TFSAs since no income tax will be due.

The way investments are structured also plays a role. Clients with investments in bond funds, individual bonds, equity funds or individual shares can, for example, draw on their bonds without touching the share portion, so as to wait until the value of shares rebounds. This is not the case for clients who have shares in balanced mutual funds.

Other products, such as home equity and personal lines of credit may also be better sources than RRSPs. It may even be appropriate to borrow on the surrender value of a permanent life insurance policy. “In the short term, it’s sometimes better to add debt instead of drawing on investments,” notes Tony Tiberio, Financial Advisor at Services financiers Tiberio Mecca. “This will protect future returns.” Clients who are expecting an income tax refund should be advised to submit their return quickly in order to speed of their refund.

Shelter investments from emotions

“In normal times, with this important life stage looming, pre-retirees are already stressed,” remarks Cédrick Jasmin, Investment Advisor and Financial Security Advisor at Whitemont. “The crisis is multiplying this anxiety. They’re seeing the value of their investments drop and are wondering if they’ll be able to retire when they want, or if they’ll have to reduce the quality of their life enormously.”

Putting things in perspective is very much the role of the advisor. Mr. Jasmin reminds his clients that starting retirement does not mean their investment portfolio is expiring. For a saver who stops working at 60 or 65, the investment horizon can extend over 20 to 30 years—or even longer. So they have a certain amount of time to see their portfolio recover.

Another temptation both for the pre-retired, and the retired, also needs to be managed. They may want to restructure their portfolio by jettisoning most of their shares and replacing them with income securities. But that’s not the best idea: “It’s too late to move, the market dropped too quickly, it’s better now to wait for the recovery,” warns Mr. Aubin.

Two strategies may work well for pre-retired clients during the crisis. It’s a good idea to re-evaluate their portfolio. They can then some share funds in some industries and buy new ones in other sectors in order to take advantage of the new situation and be better prepared for the recovery. The other approach is to adjust their allocation strategy. “We felt that a recession was coming and we had already reduced the weighting of shares in several portfolios,” explains Ms. Soucy. “Now that the market has dropped substantially, we can think about repurchases, to take advantage of low prices and benefit from growth when things restart. But you have to make sure clients are comfortable with this approach.”

The Chambre would like to remind you that the role of the advisor is to make the best recommendations but the decision belongs to the client. Advisors must be able to demonstrate they have done their work well and have provided warnings to their clients. This means it is crucial to note in the client’s file all your messages and efforts as well as the recommendations you have made.

For retirees

Of course, the current context is particularly worrisome for retirees with RRIFs or life income funds (LIFs) who must withdraw a minimum amount from their investments each year. The federal government quickly reacted to this situation by reducing by 25% the minimum withdrawal requirement for RRIFs in 2020. “I’m also suggesting to some of my clients to wait till the fall to tap their RRIFs, if they can do so, explains Mr. Aubin. ‘Now is really a bad time to withdraw.’

Ms. Soucy adds a reminder: labour fund units were rated in 2019, prior to the drop. Normally their values are set twice a year, but this may be delayed to take into account the correction. This means it may be good for some retirees to withdraw money from these funds, even to use a portion to reinvest in the equity market at a time when prices are low.

Daniel Bissonnette, branch manager at Investia and CEO at Planifax Vie Plus, thinks that now is a time when you can see if you have played your role as advisor and educator to your clients well. He has not seen a trend among his clients to exit the market. On the contrary, several of them are taking advantage of low prices to make investments. This is particularly the case among those who sold shares when values were high, specifically to build a cash reserve to return to the market after a correction. ‘We shouldn’t think that all retirees are very conservative with their investments, the majority want to continue to get interesting returns,’ he says.

He thinks that with lean interest rates appearing to become the new normal, retirees will have to be a bit bolder with their investments. “Otherwise, they’ll run through their capital too quickly and may run out of funds,” he explains.

“Since the start of my career, I’ve seen Black Monday in 1987, the 9-11 attacks in 2001, the 2008 crisis,” remembers Mr. Tiberio. “We’re going to come out of this as well.”

Refer to the CSF’s Info COVID-19 section for more information