Enhancing the professionalism of financial advisors in the best interests of the consumer



Editor's Letter – Kristin Doucet

This & That

Field Notes – Parties that Empower by Andrew Guilfoyle

Innovators – Charting New Courses by Kira Vermond & Kristin Doucet

Retirement Planning – Case Study by Michael Callahan

Tax & Estate Planning – Estate Fees by Jamie Golombek

Financial & Retirement Planning – Annuities by Lynn Biscott

Succession Planning – Both Sides Now by Craig Harris

The Small Business Client – Renewals by Mike McClenahan

Advocis News

The Final Word by Dean Owen


It’s no secret that Canada’s baby boomers are putting an increasing strain on health care and pension plans across the country. However, while this poses significant socioeconomic concerns, a massive wave of retirees in Canada also presents a huge opportunity for financial advisors: helping baby boomers transition into retirement

By Michael Callahan

Case Study

Baby boomers were born during the demographic post-World War II “baby boom” between the years 1946 and 1964. In Canada, the evidence of this boom is all around as every day 1,000 seniors turn 65.

Earlier this spring, Statistics Canada released its latest findings based on the 2011 census data:

  • In 1961, at the peak of the baby boom, 34 per cent of the Canadian population was aged 14 and under. By 2011 that share had been cut in half to 16.7 percent.
  • In 1971, only eight per cent of Canadians were 65 and older. By 2011, our seniors population had ballooned to 14.8 percent — almost 5 million seniors out of 33.5 million Canadians.
  • Over the next two decades, it’s forecast that almost one-third of all Canadians will be 65 and older.
  • In 1961, the median age in Canada was 26.3. Last year it was 40.6.

Boomers control a staggering amount of the wealth in Canada. Just how much? According to Investor Economics Inc., over 70 per cent of all the wealth in Canada resides with baby boomers. Furthermore, it’s been estimated that boomers are set to inherit over $1 trillion from their parents over the next 20 years. Economists say it’s the biggest transfer of wealth in Canadian history.

While many advisors often target business owners, doctors, and other professionals as potential clients, they shouldn’t overlook the absolutely massive amount of wealth that resides with boomers, including those who are not necessarily business owners who happen to be married to doctors.

Let’s consider a few common issues that come up with many baby boomer clients as they prepare for retirement.

Income generation. During our working years, we put a heavy focus on capital accumulation and growth. In many cases, this pool of capital will be used, either in part or in whole, to generate an income in retirement. It follows that at least some segment of most advisors’ clients draw an income from their investments. How are they generating this income? Investment portfolios consisting of stocks, ETFs and mutual funds, a laddered GIC strategy, corporate and government bonds, and annuities are all valid options.

CPP Timing. As of January 1, 2012, eligible Canadians can start receiving Canada Pension Plan (CPP) payments as soon as they turn 60, and no longer have to cease working. Of course, CPP can still be taken at the “normal” age of 65, or delayed up to age 70. Those who elect to begin taking their CPP payments early will be subject to a reduction, and those who postpone will enjoy an increased rate. This begs the question, “What’s the best age to start drawing CPP?”

Life Insurance. Most clients will require life insurance at some point in their lives. However, deciding on an appropriate policy and level of protection is far from an exact science. Term policies are definitely cheaper today, but over the long run, permanent plans can prove even less expensive. Whether it’s term or permanent, or a blended plan such as a universal life (UL) policy with a term rider, insurance protection can be secured in many different forms.

The recommendations pertaining to these concerns, as well as many others, will be specific not only to each individual client but also those offering the advice. Keep in mind that different advisors — with the same credentials and training, and perhaps even working in the same office for the same company — can analyze the same client and yet come to a different set of recommendations. Why? As we’ll see, in many cases it’s not necessarily a right or wrong decision, but, rather, that they have different ways of achieving the same objectives.

To explore some different strategies and products advisors use to tackle common retirement planning concerns, FORUM spoke with three financial advisors to get their feedback on a baby boomer client couple.

Let’s meet the Sarlos.

Advisory Panel

Meet the advisors:

Teresa Black Hughes, CFP, R.F.P., CLU, FMA, CIM, is a financial advisor with Rogers Group Financial in Vancouver

Bob Challis, CFP, RHU, TEP, is a financial advisor and founding owner of Nakamun Financial Solutions in Winnipeg

Andrew Guilfoyle, CA, CFA, is a financial advisor and partner with Guilfoyle Financial in Toronto

Case Study:
Michael and Malena Sarlo

Michael Sarlo, age 63, has recently retired from the workforce and is enjoying his newfound freedom in retirement. Michael was a self-employed carpenter by trade and has no employer pension. His wife, Malena, age 61, is retiring this month from her position at the Nature Conservancy where she is a biologist. Now that Malena is retiring too, the Sarlos are really looking forward to making the most of their retirement together.

Michael has a non-registered portfolio of $153,000 and an RRSP balance of $387,000. Malena’s RRSP is $82,000 and her non-registered portfolio is $121,000. In addition to her personal savings, Malena also has a defined benefit employer pension plan which pays $34,772 annually, indexed to inflation (as measured by CPI). Both Michael and Malena are non-smokers.

The Sarlos have two children: Noah and Ethan. Both have graduated from university, have secure jobs, and have moved out of Michael and Malena’s home. Noah and Ethan are no longer financially dependent on their parents. However, both Michael and Malena agree that they would like to set aside some money for their children, either as an inheritance when they pass, or perhaps to help fund the costs of post-secondary education should Noah and/or Ethan have children of their own.

Michael and Malena own a house in the city as well as a cottage on a lake about an hour’s drive from their home. Both properties are mortgage-free — the cottage has a fair market value of $150,000 (purchased for $50,000) and the house is currently worth $330,000 (purchased for $105,000). They have no plans to sell either property and would like to live in their home as long as possible, and ultimately leave the cottage to the children.

Neither Michael nor Malena are currently receiving CPP payments; they are wondering if they should start as soon as possible or wait until age 65 or perhaps even later. They desire a combined household annual income of $50,000 after-tax (indexed to inflation) but have no idea how their portfolios should be designed to generate the necessary income. They have no insurance outside of Malena’s group plan, which will cease upon her retirement this month.


Note that the advice pertaining to the Sarlos could develop into thousands of words, and pages and pages of complex financial plans exploring different options; but in the interest of time and space, we’ve asked our industry professionals to comment on a few key points, including:

  • income generation and portfolio construction — products, allocation, rates of withdrawal, etc;
  • CPP timing decision — now, at 65, or later;
  • tax and estate considerations; and
  • insurance needs and potential solutions.

Let’s see what our panel of advisors had to say …

… About Insurance

Andrew Guilfoyle, CA, CFA: I don’t see a definite need for Michael and Malena to have life insurance. It could certainly prove useful, but it’s not critical to them achieving their financial goals.

The three possible uses for life insurance would be for final arrangements and expenses, capital gains on the cottage, and to cover off the tax on the RRSP, which will eventually be turned into a RRIF. It’s important to note they would be paying out of personal funds so there is no capital dividend account tax advantage. They are not eliminating any of these expenses; they would simply be pre-paying them and ensuring liquidity at the time of their passing.

Teresa Black Hughes, CFP, R.F.P., CLU, FMA, CIM: Insurance is not necessary in order for the cottage to be passed on to their children, nor is it a necessity for providing or preserving cash flow for the surviving spouse. But insurance could play other roles in their planning.

Since the Sarlos have sufficient after-tax income to meet their needs, they could use some of the excess cash flow to pay for an insurance policy to benefit charity, if they were so inclined. For example, they could diversify some of the investment capital into a life annuity in about 10 years’ time, and ensure return of the capital to the final estate via a life insurance policy. Alternatively, they could arrange funding via a charitable annuity. [In any case], the point is that insurance, while not necessary, could be used to enhance [the value of] their estate or facilitate charitable giving.

Bob Challis, CFP, RHU, TEP: While the Sarlos may not have a specific need, certain forms of life insurance act as a very efficient shelter from investment taxation, can convert deferred earnings to non-taxable payments, and can offer predictable dividend rates on cash values, which are currently in the four- to seven-per-cent range. Given that Michael and Malena appear to have excess capital and income to their current and future security needs, and no need for high-risk investments, they are ideal candidates to benefit from these unique features.

AG: If they were to secure life insurance protection, the policy should definitely be a permanent plan. In order to manage the taxes ultimately owing on the cottage or RRSPs, a joint second-to-die policy can be used to lower costs, as this is when the tax bill will come due. A universal life policy will have lower annual costs, but if they feel healthy, have a decent life expectancy and a positive cash flow, they may want to consider a whole life policy. This could give them a safety net of cash values to be accessed well into their 80s or 90s.
One final insurance consideration should be a long-term care policy. One of the greatest financial risks would be that one or both of them suffers a severe long-term illness, such as Alzheimer’s, and requires ongoing assisted living, which can be quite costly.

… About CPP

TBH: If Malena took CPP now, at age 61, she would see a reduction of $246 per month, advancing $35,500 before age 65. The break-even point is age 77. Michael’s CPP would be reduced by $123 per month if he was to begin taking payments now at age 63, advancing $20,724 before age 65. The break-even point for Michael is age 79. I recommend they collect CPP immediately, with the view that a bird in the hand is better than two in the bush.

BC: We used our planning software to establish a baseline measurement for Michael and Malena, and then ran a few “what if” type scenarios on such decisions as triggering CPP and RRIF payments now or later. In short, the Sarlos are in great financial shape and should be able to generate the income they desire, leave the cottage to Ethan and Noah, and an inheritance to the kids and/or grandkids.

As for CPP and RRIF timing, we found that the overall estate values increased dramatically based on a few variables. Consequently, we would recommend waiting until age 65 for CPP, and age 72 for RRIF payments. However, pension splitting and maximizing TFSA contributions should begin immediately. According to our calculations, this yielded the best overall results.

… About Generating Income

BC: In regards to generating income for the Sarlos, I’d recommend supplementing Malena’s pension income with withdrawals from non-registered investment portfolios until CPP and Old Age Security (OAS) payments begin. They have no real need to take an aggressive stance. They can invest conservatively, with a view to tax efficiency and capital preservation. They should consider using corporate class and/or blue chip dividend investment funds with an option for capital only withdrawals, and investment funds offering a 100 per cent capital return guarantee and a growth lock-in or reset feature. Additionally, I’d recommend they minimize market risk by maintaining a “cash wedge” strategy at all times, and place longer-term oriented assets in their TFSA accounts.

AG: In a low-return environment, their RRSPs balances will likely decline once they’re turned into RRIFs and the Sarlos are forced into minimum withdrawals. While the RRSP/RRIF accounts can be rolled over to each other on a tax-deferred basis upon the first spouse passing, 100 per cent of the remaining balance will be taxable as regular income upon the second death. It should also be recognized that the RRSPs would currently attract significant tax should both Michael and Malena pass away in the near future.

TBH: For the Sarlos’s investment portfolios, I’d recommend an overall 60/40 fixed income/equities split across all accounts. However, the mix can be managed such that the greatest portion of the equities weighting is held in their non-registered accounts. Also, Michael and Malena should take advantage of tax-savings opportunities and maximize their TFSA contributions.

While I won’t comment on particular stocks or products, I’ll make a few high-level recommendations. I’ve indicated that the majority of their assets would be invested in fixed income, but they shouldn’t overlook growth opportunities for a small portion of portfolio, such as emerging markets or U.S.-based securities. Also, they can build some risk protection into their portfolios with tangible assets such as real estate and gold, and inflation protection with real return bonds. And while Canada is still a great place to invest, they should include quality global bonds in their fixed income holdings.

… About Estate Considerations

AG: If the cottage is eventually sold or transferred to Noah and Ethan, there will likely be significant tax owing due to the appreciation of the property and associated capital gain. While paying the tax bill may not pose a huge problem, it would be important to have a conversation with Michael and Malena about how likely it is that Noah and Ethan would want to share the cottage moving forward. In time, that conversation could also happen if and when the sons marry. One question to consider is: Will the four of them get along well enough to share the cottage? Also, if significant renovations have been done to increase the value, then receipts should be maintained to increase the adjusted cost base (ACB) over and above the purchase price.

Different strokes for different folks

While some advisors argue that as boomers near retirement they will become more conservative with their investments and avoid stock-market-based equity investment, others believe that as life expectancy increases, boomers should maintain adequate equity exposure to preserve their purchasing power and stave off inflation. Decisions around establishing an appropriate asset mix, deciding on when to commence CPP payments or convert RRSPs to RRIFs, and how to effectively transfer the family cottage to the next generation are all great ways advisors can demonstrate their value and continue to strengthen relationships with their clients. Helping boomers transition into retirement — and working with them throughout their retirement years — is perhaps one of the highest callings of the financial advisory profession.

Michael Callahan can be reached at Callahan_michael@yahoo.com.
If you would like a PDF of this article, please email FORUM editor Kristin Doucet at kdoucet@advocis.ca.