• Thu. May 23rd, 2024

Why DIY investors are turning to financial professionals as retirement approaches

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Older DIY investors often seek advice on how to adjust their portfolios and plan their estates as they approach retirement.SrdjanPav/iStockPhoto / Getty Images

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In Ed Rempel’s Toronto practice, there’s always a familiar group seeking help: former do-it-yourself (DIY) investors.

These are the ones who managed their finances – many successfully – on their own but have suddenly hit a wall in their 50s and 60s.

“They think accumulating a portfolio is something they can do, but feel overwhelmed about how to set up their retirement income,” says Mr. Rempel, a fee-for-service financial planner.

That’s understandable, says Maili Wong, senior portfolio manager and senior wealth advisor with The Wong Group at Wellington-Altus Private Wealth Inc. in Vancouver.

Many clients need guidance on the best time to begin taking their Canada Pension Plan (CPP) benefits or tapping into their registered retirement savings plans. Some want to help their adult children buy property but worry they may drain their retirement savings. Others wonder whether their investments are too conservative to keep up with inflation, while some wonder if they’re not conservative enough. And all of them want to ensure they’re taxed as favourably as possible.

“There are all of these events,” Ms. Wong says. “This is now serious business.”

She says advisors need to take on a financial planning role for former DIY investors, determining clients’ cash flow, their future lifestyle and whether they plan to transfer wealth to younger generations. At the same time, portfolios need to be assessed to determine if there’s enough growth to ensure cash flow in the future.

By plugging in several factors – such as tax rates, rates of return, longevity projections and cash flow demands – advisors can present the client with a variety of scenarios, Ms. Wong says.

These scenarios – generated by advisors and their sophisticated financial planning software – can be very illuminating for clients, she says, as they can help them decide whether to change their investment risk tolerance, give money to loved ones and inform estate planning.

“That equips the investor with a better-informed view of what is probable or likely so they can make an informed decision,” she says.

Providing an objective view

DIY investors who have been investing for a long time on their own will likely have some staunch beliefs with respect to their assets.

“You have to be aware of the biases they’re facing,” Ms. Wong says. “Maybe they’ve chased cannabis or mining stocks.”

In terms of the asset mix, the primary objective is ensuring there’s enough money for the long haul, says Bob Sewell, president and chief executive officer at Bellwether Investment Management Inc. in Oakville, Ont. Investors are often overly concentrated in Canada, investing in companies they recognize and are comfortable with, even though the Canadian market is “too narrow,” he says.

In some cases, investors’ investments are too aggressive and need to move to balanced investments. Mr. Sewell often recommends investing in private lending to create income with some growth.

Mr. Rempel says a conservative stance is usually the first thing that needs to go because of factors such as inflation and the high cost of living. The “shocking” number in many financial plans is that more than 70 per cent of income during a 30-year retirement may need to come from investment growth after retirement, he says.

“Many people make the mistake of investing too conservatively, which means they have to cut back [on] their lifestyle,” he says. “They usually end up saving far too little.”

Figuring out what to withdraw and at what time is also challenging, Mr. Rempel says. Many are confused about when they should start taking their pensions, including CPP, Old Age Security and company pensions.

Others weigh whether they should take more out of a registered account in retirement so it’s not too large and heavily taxed when they die.

“You have to decide whether it’s better to defer taxes as long as possible or to withdraw the amounts you can at low tax brackets every year,” Mr. Rempel says. “Each person’s situation is unique.”

Other tax-mitigation strategies

Ms. Wong says investors should consider life insurance to pay off tax obligations when the second spouse dies. “You get a tax-free lump sum when the taxes are due,” she says, which can help pay for taxes on second properties, capital gains, or when a registered retirement income fund is rolled over. That can prevent selling off assets when beneficiaries aren’t prepared for a large tax bill.

“That’s where professional advisors can help DIYers see the different tools in the toolkit and see a big-picture approach,” she says.

Mr. Sewell says pension splitting is another strategy to consider, with spouses dividing their pension income to lower their taxes.

Retirement planning comes down to how much clients can withdraw or have to save for the lifestyles they want, Mr. Rempel says, while minimizing the tax burden. And sometimes getting professional help is warranted.

“Figuring all this out in a financial plan gives you the confidence to know what lifestyle you can afford for the rest of your life,” he says.

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