HOW MUCH RETIREMENT SAVING IS ENOUGH?

It’s rare that a month goes by without a new survey describing Canadians’ poor retirement planning. Some are only moderately alarming, featuring data about working longer and anxiety at the prospect of outliving savings, while others reveal generational gaps in planning that will become harder to ignore.

There are counters to the gloomy pattern of research from investment firms, though. A 2015 C.D. Howe Institute report by actuary Malcolm Hamilton said “reports of under saving by Canadians for retirement are exaggerated.” Between 1990 and 2012, contributions to retirement plans as a percentage of earnings have nearly doubled, the report says, from 7.7% to 14.1%—even as the rate of household saving dropped. Statistics Canada’s 2016 census said two-thirds of households are saving for retirement through pensions, RRSPs or TFSAs.

But while Hamilton’s numbers showed that the savings rate is rising, he didn’t pretend to know whether 14% is enough. Retirement goals are too diverse to provide a general answer for what “enough” means, he wrote.

Advisors can help clients figure that out—especially when conventional retirement wisdom is flawed.

A 2017 CIBC Asset Management paper titled “Cat Food or Caviar” warns that the widely used 4% withdrawal rate is based on dated assumptions, and that current long-term return forecasts are closer to 3%.

That means clients will have to either spend less or save more than expected.

Fortunately, the nudges for getting people to put money away are becoming more sophisticated. Last year the Nobel committee recognized Richard Thaler, the behavioural economics pioneer whose work included automatic enrolment and escalation for American 401(k)s. Apps that take the thinking (and destructive rationalizations) out of saving are proliferating. There is still room, however, for an advisor to play a crucial role in developing an overall plan and to coach clients through the process of retirement saving.

Just getting people to think about aging, without the financial implications, is hard enough. In The Coming of Age, Simone de Beauvoir wrote, “When we look at the image of our own future provided by the old we do not believe it: an absurd inner voice whispers that that will never happen to us—when that happens it will no longer be ourselves that it happens to.” (Our cover is a nod to this idea.)

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Advisors developing retirement plans are asking clients not only to imagine a nebulous future but to quantify a comfortable lifestyle for it—and to take from the present to make it so.
The retirement saving article in this issue looks at some of the ways to overcome obstacles to saving by understanding and, in certain cases, embracing irrational behaviours. These include seasonal risk tolerance, elaborate rituals, and the lack of empathy with a future self that de Beauvoir described long before psychologists had measured its impacts and marketing divisions had used it in product pitches.

This type of skill will become more important as advisors’ relationships with clients change. In its 2012 report describing “advisor’s alpha,” Vanguard sought to broaden the term’s meaning beyond simply beating the market. Advisor’s alpha means helping clients stick with their long-term financial goals. Good advisors are behavioural investment coaches, the report said.
Six years later, the message hasn’t taken hold. At an autumn IMCA event, Daniel Crosby, president of Nocturne Capital, lamented that the industry has mis-marketed itself for decades by not touting the value of behavioural coaching. With regulatory chatter and robo-competitors forcing the value of advice into the spotlight, the coaching role also offers advisors a way forward with continued relevance.

After all, while new tech tools are good at automating behaviour, humans are better at helping clients articulate attainable goals—and encouraging them to stick with them through rough markets.

Human advisors also make it easier to reach those goals by helping to fulfil non-financial retirement needs. For instance, one advisor told us he taught a retiree how to use a ride-sharing app so she wouldn’t have to rely on family members to drive her to meetings and other appointments.

Defining how much retirement saving is “enough,” and what retirement help looks like, is a highly personal choice that advisors can help clients determine.
So while the lack of a broad definition for sufficient retirement saving will always leave room for popular anxiety to be measured, packaged and distributed, you can help make sure your clients aren’t part of those headline statistics.