Preparing Canadians for the unknowns of retirement

Franklin Templeton wealth expert talks about investors' rising risk focus and the importance of fluid planning

Preparing Canadians for the unknowns of retirement

The goal of retirement weighs heavily on the minds of many Canadians, not least because of all the obstacles and unknowns that they’ll encounter along the way. And for the majority, those unknowns have gotten all the more difficult to weigh.

In its latest RISE survey, Franklin Templeton Canada found that nearly four fifths (79%) of Canadians think the right time to start saving for retirement is by the time they’re 30 years old. But even with that wide awareness, one in four retirees feel they have not set enough aside; a third of that group saying they had to prioritize debt repayment – an issue that made the top 3 list of concerns across all age segments, from young adults in their 20s to seniors in their 60s and beyond.

Risks and unknowns in focus
“Many Canadians took advantage of historically low interest rates and strong overall economic climate we’ve seen over the last decade,” Manmeet Bhatia, head of Private Wealth at Franklin Templeton Investments Canada, told Wealth Professional. “Whether it involves low-interest mortgages or obtaining financing for other major purchases, Canadians in aggregate have incurred a significant level of debt over this period.”

That has contributed to a wholesale rise in asset portfolio values over the last 10 years. But today, many individuals are starting to shift their focus to the liability side of their balance sheets, where debt has continued to grow.

 “Take the long-term debts that people have taken on, and couple that with unexpected short-term debt that many have been pushed into, and we see more of a focal point emerging toward the liability side of the equation,” Bhatia said.

On the investment side, he believes Canadians’ initial blind spot came as a result of recency bias, a behavioural-finance concept referring to how people tend to put greater weight on events and outcomes from the recent past. In the midst of a long-drawn bull market, many investors may have assumed that the gains would keep coming, and too many portfolios went without rebalancing for risk.

“The consequence of all this is that the magnitude of losses suffered by some of these investors, at least at the onset of the downturn, may have been significantly more than what they were expecting, and cause some of them to move to cash at the worst possible moment,” he said.

‘Retirement is a big unknown’
It’s been a rude awakening for many who are now just realizing that they may have overreached on their goals. For such individuals, Bhatia said, job one will be to go back to the drawing board and ensure they have realistic and achievable timelines for their financial goals, considering both their individual circumstances and their environment.

Still, he acknowledged that to a large extent, near-retirees don’t understand or have strategies that consider the nuances of living on a pension, old age benefits, and their eventual nest egg. “We talk about retirement as a big unknown,” Bhatia said, describing widely recognized gaping blanks in retirement plans such as life expectancy and unexpected expenses.

That unknown has only become even more imposing in the wake of the COVID-19 pandemic. The initial panic surrounding the novel coronavirus has given to a low-grade, pervasive anxiety, as it remains unclear exactly how long lockdown measures will stay in place, whether the business disruptions and job losses can ever be reversed, and how big an impact the economy and individual households will ultimately suffer, among other questions.

“This is really a key reason that professional advice and a plan should be in place for investors,” Bhatia said. “For most of us operating in a vacuum without guidance and a roadmap, these are going to be key contributors to the concerns we have about retirement.”

Stay on course, but plan for detours
While keeping clients’ expectations grounded is paramount, Bhatia said advisors should not necessarily be pessimists. Rather, they should be realists who consider different possible outcomes for retirement. That means given a range of expected rates of return, they should be able to plan for a base case scenario, a more pessimistic scenario, and an optimistic scenario to give clients an idea of what could happen and how they’d have to adapt in case the world changes.

“Educating people is about explaining that their financial roadmap isn’t meant to be a static plan, but a fluid one,” he said. “If you're on the highway and there's an unexpected road closure, you've got to take a detour, and we just have to make sure that the plan provides for the fact that there's always going to be something.”

An advisor’s value doesn’t end with setting the plan. Even with a clearly charted path, clients can too easily violate even the most basic rules and principles. Children understand why “buy low, sell high” is a good idea, but that lesson is lost on adult investors who are caught emotionally off-guard when market turbulence strikes.

Those who vigilantly watch their portfolios may not be doing themselves any favours, either. Bhatia said that one in four Canadians check on their retirement savings at least weekly, increasing the risk of stress caused by short-term volatility.

“Financial professionals can help not only set up a plan, but also ensure there's context provided, acting as a translator regarding the short-term noise that surrounds us and veers us off of the original stated plan,” Bhatia said. “So whatever the new normal may look like, I think professional advice can really help us ensure that a plan is not only set up, but we remain on track to achieve the targets in our plan.”


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