Continuing Education for Financial Service Professionals
Retirement Income: Building Towards Answers
Executive Overview This course will provide and supplement knowledge about retirement income issues for financial advisors whose responsibilities include retirement income planning for clients. We analyze and review: -
the importance of creating a relationship built on trust and understanding; the advisor!s role as an educator on issues like financial literacy and
financial fraud, particularly for seniors; -
generic factors that must be considered in every retirement plan, such as
age, gender, and marital status; -
the schools of thought on retirement income planning and such topics as
the safe withdrawal rate; -
the factors that can diminish retirement savings; all sources of income including employment earnings, pensions --- both
public and private, and personal savings with particular attention to the changes being implemented in government programs; -
risks to income;
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tax issues;
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how to allocate retirement expenses to determine what the required level
of retirement funding is. We do this using the user-friendly idea of cookie jars and having funds available in each for specific expenses; -
solutions for creating more income; aging and financial decision-making and whether trusts and power of
attorney should be used.
Table of Contents THINKING ABOUT RETIREMENT STARTING WITH THE RELATIONSHIP THE TRUSTED ADVISOR MORE THAN ADVICE SOME FUNDAMENTALS ABOUT RETIREMENT INCOME HOW MUCH SHOULD I SAVE? HOW MUCH CAN I SPEND? CROSSING THE RUBICON FACTORS THAT AFFECT THE RETIREMENT PAYCHEQUE INTRODUCING A COOKIE JAR THEORY THE MONEY COMING IN Income from Employment 48 Pensions from Employment 50 Personal Savings and Investments 59 Non-registered Personal Savings 77 Government Retirement Pensions 85 Checklist of Income Sources 92 YOU CAN BUY INCOME WITH A WINDFALL THREATS TO INCOME TAX AND RETIREMENT INCOME DETERMINING RETIREMENT INCOME Cookie Jar No. 1: Replacement Costs 106 Cookie Jar No. 2: End of Life/Legacy Costs 110 Cookie Jar No. 3: Living Expenses 114 Cookie Jar No. 4: Emergency Funds 116 Cookie Jar No. 5: Choices 118 THE UNDERFUNDING PROBLEM THE AGING BRAIN AND FINANCIAL DECISION-MAKING CONCLUSIONS
4 6 10 14 26 34 39 41 44 47
93 95 100 104
122 124 130
Retirement Income: Building Towards Answers is copyright CLIFE Inc. 2012.
All rights are reserved. That means no photocopying, scanning, or file sharing. The information in this book is provided for educational purposes only; it should not be construed or interpreted as providing advice. Readers should seek guidance from their principals and compliance experts in regards to informing themselves about details of the products they sell, services they provide, and other considerations of their business.
Retirement Income: Building Towards Answers provides continuing education credits for life agents and CFP professionals upon satisfactory completion of an online test.
CLIFE INC., 1595 Sixteenth Ave., Ste, 301, Richmond Hill, ON L4B 3N9 www.CLIFEce.ca
THINKING ABOUT RETIREMENT The image of what retirement means has undergone quite a transformation in recent years. Once, it evoked an image of a grey-haired senior living a quiet life, passing the time. Now, thanks partly to the baby-boomers, retirement has taken on the “wow factor.” Careers that were carefully nourished turn out to just be a stepping-stone to the major event of life: retirement!
This vision of retirement is based on living the dream: no work, few responsibilities, perfect health, and money available to fund every heart’s desire.
We now know that the dream is, for many, just that…a dream. Retirement realities include the responsibilities of caring for aging parents and young adult children, imperfect health, and financial uncertainty. Coupled with these factors is a lengthening lifespan in which a person can expect to live thirty years or more post-career. These demands have created a need for planning like never before, to ensure the highest possible standard of living for the longest possible time. The need is indisputable; the issue is the planning process.
What are some of the retirement variables? When and how to plan for retirement is key to you, the financial advisor, as you create the working relationship with a client. There are countless variables that you will discuss together: -
Is retirement on the radar?
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Do you advise the couple or a single person;
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What is the age of the client when you and he or she begins
your relationship; -
What was the age of the client when he or she began retirement planning;
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When does the client, and his or her spouse intend to retire;
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What are the client’s real and perceived needs;
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What are the client’s goals and dreams;
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What are the client’s health and wealth;
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What are the client’s motivation to plan, and what could sidetrack that
motivation; -
and so on.
What are the opportunities for the advisor when planning retirement? Also, rarely discussed, is the issue of the business the client will bring to you in the course of planning. Will there be opportunities for product sales or referrals? If you will not be receiving a commission in recognition of the time and effort you will spend with the client and the advice you will provide, will you charge a fee for service, and can you anticipate charging that fee on an ongoing basis?
Like most advisors, you need to create an income and, for this reason, you will be motivated to work with clients who represent opportunity. (This is why you will rarely see a discussion about retirement income planning that mentions lowincome retirees, such as those who would receive the Guaranteed Income Supplement [GIS]. Without better income, investable assets, or the ability to fund life insurance needs, this group doesn’t receive the benefit of professional financial advice.)
STARTING WITH THE RELATIONSHIP
Learning Objectives: Describe what clients should expect from working with you. Explain the difference between being reactive and proactive. Describe how advisor credibility can be asserted. What are the principles of planning that apply to all clients? Fundamental to creating a plan --- retirement or otherwise --- is building and nurturing the relationship so that it is a win-win for the client and the advisor. Here is what Meir Statman, Professor of Finance, Santa Clara University and the author of What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions says,
"Good financial advisors manage investors as much as they manage investments. They engage in real conversations with clients by asking, listening, empathizing and educating, before prescribing investment solutions.�
This means that while clients expect a satisfactory financial outcome from their relationship with you, they also expect a satisfactory emotional outcome. This is our starting point. It is one that can be overlooked in haste because it may seem, for instance, that calculating a lifetime income option from a segregated fund brings greater value to the table. That sort of professional expertise is invaluable but honing your people skills can make you the preferred advisor!
Do you proact or react? A typical conversation sees a to-and-fro between parties. One person typically leads the conversation, and is therefore in control. The other person will be less dominating --- even passive --- in the interaction. -
the leader will be proactive and will ask questions and provide information.
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the passive party is considered reactive; they react to the direction the
leader takes them. They’ll provide the answers to what the leader asks.
Many financial advisors place themselves squarely in the reactive category when it comes to establishing their credibility. The Financial Planning Standards Council (FPSC), which administers the Certified Financial Planner (CFP) designation in Canada, advocates this approach with their online article “Ten Questions You (i.e., a client) Should Ask Your Financial Planner.” You will probably have seen similar suggestions elsewhere, along the line of “What to Ask Your Financial Planner.” The position taken in these articles is that the client needs information about you, the financial advisor, and the articles provide the questions to ask.
The questions revolve around the planner’s credentials and approach. However, expecting the client to ask these questions in a first meeting creates a confrontational setting and diminishes the authority of the advisor. It can also undermine respect and allows the client be in control.
Further, asking such questions is very uncomfortable for some people. Older-age individuals have a very high degree of respect for the privacy of others, and as much as they would like to know information such as how much you’ll be paid for the service you propose, they simply feel it is an invasion of privacy to ask the question.
How to establish credibility Start the relationship on the right foot by being proactive. You are the financial expert and you must assert this position. Don’t wait to be asked: offer information instead of being asked for it, or instead of both parties being silent on the issue. This is an opportunity for you to be entirely forthcoming and set the stage for the professionalism you bring to the relationship. You will be fulfilling one of your responsibilities: to educate your clients. So, the first education they are going to get from you is about you.
Display framed certificates and degrees you have attained in your office. This is similar to the mechanic who displays his credentials on the wall of his garage: he may not be perfect but at least you know he’s trained. Prepare a biography of you
on paper that you can use in client meetings whether in your office or in their homes or offices. Put it in their hands. It will cover the following:
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Qualifications: It is arrogant to put letters behind your name when the people you are trying to impress with those letters do not know what they mean or stand for. If you have a degree, spell it out and add where you got it for a personal touch. Say what you are qualified to sell in plain language, i.e. “I sell life insurance including annuities and segregated funds, and mutual funds.�
If you have a professional designation, such as a CLU (Chartered Life Underwriter) or CFP, again, provide the full name of the designation.
If you are life licensed, indicate you have completed the Life Licensing Qualification Program (or previously Licensing Level 1 and 2). You may not put the letters LLQP following your name. You should not provide your license number unless verbally requested. This is for your personal protection.
If you are mutual funds or securities licensed, provide the name of your regulator, but again there is no need to provide registration numbers.
List continuing education courses you have completed in the last 12 or 18 months.
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Representation: Present a list of the names of companies you work for
or represent. Make it clear which products are provided by which companies.
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Experience: How long have you been a financial advisor and what did
you do before? What other activities are you engaged in on a community or public level?
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Services: What services do you provide, and when do you call on a
specialist? Who do you use as a specialist for legal, real estate, or tax matters?
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Compensation: Who pays you for the services you provide? You do not need
to reveal amounts received.
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Regulation: Who regulates you as a financial advisor? Where could the
client check your licensing? Provide the names, phone numbers, and website addresses for all relevant bodies, such as the FPSC or your provincial insurance regulator.
By providing this information without being asked, you have established a degree of trust. You have shown your clients who you are and that you are a qualified member of the financial services industry; they know what you can do. However, it is your ongoing ethical responsibilities that reinforce that you are working for your clients and not the other way around.
What is the bedrock of the client relationship? The biography you provide begins to establish trust. You have shown the client that he or she can trust that you are qualified, regulated, and experienced. As we said, it’s a starting point.
To build trust, to attain the coveted status of being “a trusted advisor,” is going to require consistency, persistence, patience, mutual respect, and clear communication. It is essential to be trusted when developing a retirement plan because retirement is the biggest financial event in a person’s lifetime. Buying a home may be the biggest purchase a person makes, but it rarely involves the creation of a saving and spending strategy over decades the way retirement does. People who plan most successfully for retirement do so because they trust the advice provided by their advisor.
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