Note: This article is part of Morningstar's September 2015 The road to retirement special report.
At 76, Victor Zikovitz has pretty well got it made. A former captain in the Toronto Fire Department, he retired in 1996 and collected a comfortable pension which he supplemented with some occasional work as a driver. As someone who grew up in modest circumstances Zikovitz has always been careful with his money and for years saved for retirement. "We were brought up with the idea that you had to work for your money and that it doesn't grow on trees," says Zikovitz, who lives with his wife, Colette, in Toronto.
The one retirement wish that he nurtured was a desire to spend winters in Arizona, where he often had visited some family members. He and his wife have achieved that goal, and then some, thanks to lifelong frugal habits as well as a windfall profit from the sale of raw land north of Toronto that he bought with two partners four decades ago. And some of the credit, Zikovitz adds, should go to Jeanette Brox, a Toronto-based senior financial consultant with Investors Group, because she helped make his retirement plan become a reality.
"She figured out what we wanted to do and hit the nail on the head," recalls Zikovitz, adding that he was willing to allocate some savings to equities. "We didn't get shook up when the market was down. She assured us that things would come around because they always do. She made us feel confident." He adds, "For years, we've been saying, 'Are we ever lucky we met her.'"
Is your retirement going to be a matter of good planning or good luck--or maybe both? And how can you ensure that your expectations of retirement meet the reality, as close as possible? From Brox's perspective, one has to be financially prudent and disciplined from the outset, as she maintains the Zikovitz's have been in the course of achieving a comfortable retirement.
"They're cautious and not the type of people who have to keep up with the Joneses," says Brox. "Every year, they ask me, 'Can we still go to Arizona?' And I show them, 'Yes, your finances are in order.' They have good budgeting and discipline. The fact is, they are committed to the plan."
Indeed, Brox adds that the four necessary ingredients to fulfilling one's retirement plan are: a willingness to take it seriously, getting professional advice, regularly reviewing the plan and making any necessary adjustments. "They have to face the reality with an attitude that says, 'Don't put off something that is inevitable.'"
Those who handle retirement best are those who are best prepared, says Lise Andreana, a Niagara-on-the-Lake, Ont.-based planner with Continuum II. "They have planned for five years or more leading up to retirement and already have an adhered-to budget. So when they go into retirement they have a pretty clear idea of how much they can spend on a monthly basis. If you don't have a clear idea of what your income sources are going to be, and what you will be spending, you can quickly fall off the rails," says Andreana. "The more disciplined you are in your day-to-day spending, the happier you will be in retirement."
From her experience, retirees tend to fall into two groups: those who save too much and those who spend their retirement income too quickly. Referring to the latter group, Andreana says, "A client will say, 'I can live on $4,000 a month,' but within a few months they're calling me and saying 'I need $10,000 for a new roof, because I didn't think about it.' They are the ones who are least likely to have prepared a budget."
In one extreme instance, a retiree who lived beyond her means did not realize she lacked the financial resources to support her lifestyle--until her nest egg had shrunk by 50% in less than eight years. "She was in huge trouble because of her lack of discipline," says Andreana, noting that about 20% to 25% of retirees get into some financial trouble. "After two years of working with her, she said, 'It's no fun talking to you anymore.' I said, 'You bet! It's not fun watching you go down the drain.'" That client left and as far as Andreana knows she never solved her financial mess.
Preparedness is a key factor in ensuring that expectations and realities are lined up, agrees Jonathan Rivard, a Richmond Hill, Ont.-based financial advisor at Edward Jones. Clients who approach a qualified financial advisor to build a financial strategy that meets certain objectives and is based on realistic expectations and a realistic budget, "will be far better off than somebody that has not put that level of care and detail into their planning," says Rivard. "Somebody who approaches retirement will have a much higher level of clarity and confidence in the direction they are taking, if they provide full disclosure to their advisor--who has educated their client on what is realistic."
Moreover, the conversation should be focused on personal goals as opposed to investment products. "Clients need a high sense of self-awareness because retirement involves major decisions. You need a financial professional to walk you through the options," says Rivard. "If it's reality versus planning, then reality is much easier to predict if you put realistic goals in place and use a process to get those goals."
Rivard outlines a five-step process designed to create a strategy that meets your goals and objectives: First, how much do you have in savings and how much are you putting aside? Second, at what age do you want to retire? Third, can you reach that goal? Fourth, how do you get there? Fifth, how will you stay on track in the event of an unexpected health issue?
"If people follow that five-step process, they will feel a lot more comfortable with the reality of retirement," says Rivard. "The reality and planning process will only match up if you've done the leg work at the beginning. Surprises will come up if you haven't planned properly at the beginning." The plan involves an appropriate asset allocation that is in alignment with your risk tolerance, adds Rivard, and having objectives that are realistic and based on your financial circumstances.
Someone with millions of dollars might get by, says Rivard, whether or not they follow a disciplined approach. "But for the average person who wants to be comfortable approaching retirement, they would feel a lot more confident and have more clarity on the direction they're going in, if they have a concrete strategy in place," says Rivard, adding that the majority of clients who come to him do not have a documented retirement strategy in place.
Too often, he observes, clients have vague ideas about meeting objectives. "You may want to take some trips, or have a certain income stream or leave some money to your kids," says Rivard. "It's very difficult to plan for those objectives, if you don't know much money you will need. It's hard to build an investment portfolio if you don't know the objectives. They should guide the returns that you may need."
But the objective may be more than one of a financial nature. Sometimes, it's matter of personal and emotional fulfilment that can't be measured in dollars. A former social worker in her mid-60s who lives in York Region, "Jane Thomson" (who prefers to use a pseudonym) has been retired for seven years. A client of Rivard, Thomson admits she is not especially savvy about finances and relies on him for guidance.
"Was I prepared for retirement? I don't think anyone my age is prepared--in that you have to grow into retirement," says Thomson, adding that too much media attention is devoted to how retirees can fulfill material needs. "You don't realize that you will grow as a person, morally and spiritually. You may think that looking after material things is enough. I don't think anyone who's retired was prepared for the world as it exists."
Some retirees may think that travel will be the ultimate in satisfaction after a lifetime of work. But it's not the case, argues Thomson, especially given the desperate state of parts of the world. "We're now aware of bigger things. We need our portfolios to do well," says Thomson, adding that she has enough to retire on and her husband, a consultant, is still working. "Our generation of retirees is more involved in care-giving for strangers. The good feelings we experience are from being able to help people on the other side of the world." Indeed, Thomson supports many causes and is now thinking harder about the financial legacy she wants to create. "We need to leave the world in a better place than we find it."
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