Excerpts from the Book – Preserving Wealth – written by Jack Lumsden, MBA, CFP®
In a recent conversation, I was asked if there are any advantages to consolidating their investments and financial advisors as they approach retirement.
This is a very common question, as many families tend to collect different investment types (TFSAs, RRSPs, LIRAs, nonregistered investment, group savings plans) at different financial institutions over their working years.
A Power Retirement Study 2019 indicated that the top three retirement issues that investors wanted advice on were:
- Mitigating risk to protect the value of their investments
- Strategies to reduce income taxes
- Development and review of a comprehensive retirement plan
Consolidating financial institutions and financial advisors will help retirees accomplish this. In addition, other benefits can include
4. Creating Tax Efficient Retirement Income and Cash-flow
5. Tax effective Estate Planning and Management
6. Reduction of Investment fees
7. Accountability
8. A Team Approach
9. Integrated Technology
10. A Single Point of Contact
Ten Reasons to Consolidate Your Investments and Financial Advisors as you Approach Retirement
1. Mitigating Risk to Protect the Value of the Investments
The three key factors when creating a portfolio for decumulation are:
a. Employ risk reduction strategies
b. Ensure portfolios remain diversified
c. Create mutli-stage retirement income portfolios
If you have investment accounts with different institutions/advisors, it can create an inefficient mix with the potential for redundancies, duplication and increased risk.
With a single advisor and financial institution, you can better manage the above three factors, including the overall asset mix and interaction between the investments to reduce overall risk.
2. Strategies to Reduce Income Taxes
Taxes are one of the largest expenses a retiree will have over their lifetime, so it makes sense to have an overall tax strategy overlay to your retirement income plan.
Based on the income strategy, different investment types can be placed in the different types of accounts (i.e., RRSPs, RRIFs, TFSAs, non-registered investments) to reduce taxes and increase asset longevity.
Specific tax strategies that need to be reviewed from an overall basis can include:
- Income splitting opportunities
- Tax credits
- OAS recovery tax
- RRIF payments
- Tax efficient investments
- Asset deployment
- Coordination with your accountant.
3. Development and Review of Comprehensive Retirement Plan
By consolidating your investments with a financial advisor who specializes in retirement income planning, you are better able to develop a retirement income and cashflow (cash flow) strategy that is based on your specific goal and objectives.
A comprehensive strategy can be developed detailing your current situation, your income requirements, and your estate objectives. With a comprehensive approach, all of the ‘what ifs?’ and options can be reviewed and modelled over time.
Equally important is the ongoing guidance, review, and annual update of your retirement income and cashflow plan.
4. Creating Tax Efficient Retirement Cash-Flow
Going into retirement, families have numerous sources of income they have to coordinate, such as:
- OAS, CPP
- pension plans
- company savings plans
- conversion of RRSPs/LIRAs to RRIFs/LIFs
- TFSAs
- and non-registered investments
Different withdrawal strategies will have different tax rates, so you have to carefully coordinate all your income streams to help make sure you don’t pay more than your fair share of taxes. Items to consider are:
- Tax credits and income benefits
- The marginal tax rates each year
- The effect on the estate plan
The retirement income and cashflow strategy needs to be customized to each family to determine the optimal coordination of income from the various sources to balance current income tax, reduce ongoing taxation over time, and the taxation on the transfer of assets to the next generation.
For example, based on the current marginal tax rates, and to reduce the OAS recovery tax, it could make sense to convert RRSPs to RRIFs prior to age 71. It depends on the overall plan.
5. Tax Efficient Estate Planning & Management
To create an efficient transfer of wealth to the next generation, all your financial assets have to be taken into consideration in your planning. To avoid mistakes, you have to be very careful of the unintended consequences of various estate strategies.
A comprehensive approach will include items such as proper beneficiary designations, estate tax and cost-minimizing planning over time, and your RRSP/RRIF exit strategy. This will also involve working with your lawyer and accountant to make sure all of the strategies make sense and don’t conflict with each other.
Also, as you age, it is important to simplify your financial assets for the surviving spouse, your family, and perhaps your power of attorney and executor.
When settling an estate or working with powers of attorney, having everything consolidated makes the process so much easier and efficient to handle from an investment, tax and legal standpoint.
6. Reduction of Investment Fees
Most institutions/advisors offer reduced fees with greater invested dollars through their high-net-worth programs.
7. Accountability
Multiple financial institutions and advisors create a lack of accountability for your retirement and income planning. This can lead to little or no proactive advice or planning, and inefficient tax planning.
8. A Team Approach
By consolidating you can gain access to the high-net-worth wealth programs that financial advisors can offer to provide specific advice on tax and estate planning.
9. Integrated Technology
With consolidation you may have a single source for online statements, tax information, and sharing of documents.
10. A Single Point of Contact
Consolidating provides your family with a single point of contact to call, someone who knows you and your family. During retirement, when you are busy, this is one of the greatest benefits of all.
This has helped tremendously during COVID, especially for our clients who are in retirement homes. We have been able to easily assemble all their tax information and coordinate with their accounts for tax preparation.
Two Reasons Not to Consolidate your Investments and Financial Advisors as you approach Retirement
- You can’t find a qualified financial advisor who specializes in retirement income and cashflow planning.
- You enjoy spending your time reviewing items such as investments, taxes, estate planning, and insurance, and you like to do your own retirement income and cashflow planning.
If you are looking for effective retirement income planning advice, it makes sense to consolidate your investments and advisors as you approach retirement.
The following excerpt from the Book – Preserving Wealth, provides a starting point for this discussion.
WHAT ABOUT RETIREMENT INCOME AND CASH-FLOW PLANNING?
“The key thing is that once you retire, you’ll want to create a strategy to replace the monthly paycheque you’ve been receiving for the past thirty to forty years with the assets you’ve accumulated over your lifetime. The basics still apply; however, there is a slight change in approach. Do you remember when you were younger and we used to go to Blueberry Hill, climb up the rock cliff, pick the blueberries, and then climb down? Later, you took your own kids.”
“Absolutely, but why to you mentioned that?”
“When you took your own kids, did you let them go ahead of you on the way up to the top of the rock cliff?”
“Yes, we did.”
“And then on the way down, were they allowed to go alone?” asked Uncle Wayne.
“No, we used to hold their little hands when climbing down,” Mark continued.
“Why was that?” asked Uncle Wayne.
“Well, on the way up, if they slipped or fell, they’d just fall down a bit, and we were there to pick them up and start again. On the way down, if they slipped or fell, they could tumble to the bottom and really get hurt,” Mark explained.
“This sort of explains the difference between saving for retirement and retiring with the need to generate an income and cash-flow stream from the assets you have accumulated and inherited. The way up the rock cliff is like saving for retirement. If you make a small mistake or slip, you can recover and continue your journey to the top. However, once you reach the top and start the descent, it’s like being retired. If you make a mistake, you have less time to recover. You could tumble to the bottom and get hurt badly.
“Just like when you held your kids’ hands on the way down the rock cliff to protect them, an experienced retirement income advisor can help retirees navigate their income and cash-flow requirements.”
“That’s a great analogy, Uncle Wayne. I can see how it’s important to make sure you have a great plan as you transition to retirement, but what are some of the key risks to retirement income planning that are different than saving for retirement?” Mark asked.
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®
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Jack Lumsden, MBA CFP® Financial Advisor, Assante Financial Management Ltd.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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