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Advisor Context

Top earners not saving enough are in for a shock

'Lifestyle creep' can lead to a rude awakening for those not putting away enough cash to support themselves later

By: GAIL JOHNSON

Date: February 06, 2017

There’s no denying that Canadians face a looming retirement crisis, with household debt levels at record highs and peoples’ long-term savings, if any, wholly insufficient.

Top income earners need not worry, one might think, but that’s not entirely true. Those who have become accustomed to a certain lifestyle but are not diligent about saving are facing their own challenges.

“I recently had conversations with a couple who were both high-income earners who are retiring soon, and they’re really nervous about how they’re going to cover their expenses,” says Ted Rechtshaffen, wealth adviser and president of TriDelta Financial Partners in Toronto. “The fact that the income they’ve been reliant on for 35, 40 years is going to stop is [finally] hitting them.”

Wealthy people who are not saving enough find themselves wondering what to do.

“Maybe you’ve been saving $4,000 a year and you need to start saving $34,000 a year,” Mr. Rechtshaffen says. “How are we going to do that? Or maybe you need to start saving $24,000 a year and work an extra year or two. There’s nothing like fear to change people’s behaviour.”

According to the most recent National Household Survey, released in 2011, 272,600 Canadians had incomes of at least $191,100, the minimum to make it into the top 1 per cent of earners. Most of the people in that category, however, earned much more, with the average income being $381,300.

The challenge for those with high incomes is what Mr. Rechtshaffen calls a retirement “paycheque,” a source of regular income in retirement. How will they build one, and will the money last long enough?

“Even for people who are very wealthy, that tends to be a worry,” he says. “You really want to have a clear sense of where things are at.”

It’s not uncommon for high-income earners who haven’t been saving enough to accelerate their savings before retirement or decide to work a little longer, he says. “Sometimes the difference between retiring at 60 and 62 can make a big difference in terms of catching up on retirement savings.”

It may be more common than people think for those with robust incomes to neglect saving, says Vanessa Flockton, a financial adviser at Nicola Wealth Management in Vancouver.

One contributing factor is “lifestyle creep.” For busy executives or professionals, time is typically a constraint. Even though they have more resources, they also have demanding schedules and often end up spending more money to save time or to reward themselves, whether it’s meals out, help at home and with the kids, or regular weekends away. It all adds up, Ms. Flockton says.

What also helps clients is having a clear picture of their short- and long-term goals. “You have to have context to what it means to save,” she says. “Saving does not have to mean you have to sacrifice everything today for tomorrow. It’s prioritizing your objectives.”

To do that, her firm uses income modelling and projection tools developed in-house that help clients visualize factors such as the long-term impact of their savings, what their income needs will be during retirement, and what their rate of return will look like after fees and expenses.

“The question is not so much a specific age of retirement but, rather, ‘When do you want your investment portfolio to start to replace your working income?’” Ms. Flockton says. “We can paint a picture of where they’re going,” she says. “We meet with clients twice a year and review that tool with them at every meeting and adjust as things change within their lives.”

Creating diversified portfolios that go beyond stocks and bonds and include alternative asset classes such as real estate and private equity to reduce risk and volatility is a key piece of financial planning, she says.

Regularly reviewing one’s financial goals and the steps needed to achieve them can’t be emphasized enough, says Dan Nolan, an Ottawa-based investment adviser with Investment Planning Counsel.

The most important thing advisers can do is not just set up a financial plan but conduct continuing check-ins, Mr. Nolan says. “Progress reviews are going to keep them on track and keep them believing in the process,” he says. “It’s really about awareness.”

It’s worth exploring why high-income earners may not be saving in the first place, Mr. Nolan notes.

It could be because they have never worried about the future, since they have always been “fine” financially. It could be because their social networks encourage big spending or because they’re too busy to stop and think about it.

But even the wealthy need to remember that anything can happen, such as a major health problem or a family business gone awry.

It’s the financial adviser’s role to keep clients thinking beyond simple assets and liabilities. Among the concerns are estate planning, corporate structure, shareholder agreements, retirement income and tax considerations and strategies.

“Our job is to create that awareness and get them to commit to start planning for the future,” Mr. Nolan says. “Once we have that commitment we can embark on that journey to understand why they don’t save money, from a cash-flow standpoint. What are the roadblocks, if any, to saving?”

The more elaborate the plan, and the more complete the picture of their financial lives, the more likely they are to follow it because they believe in it and they can visualize it, he adds.

If they don’t follow the plan, “the amount of money they’re going to need to set aside to satisfy their desires in retirement – they’re used to a certain lifestyle – is going to be hugely more substantial.”

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