December 7th, 2011 by Dan Richards, ClientInsights.ca

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Many Cana­di­ans are unsure if they’ll be able to hit their long term goals and as a result feel out of con­trol of their finan­cial future.

In a recent arti­cle in the Globe and Mail, I dis­cussed the need for investors and the advi­sors they work with to review and update finan­cial plans, stress test­ing those plans by look­ing at the impact of dif­fer­ent sce­nar­ios going for­ward in three cat­e­gories. Advi­sors need to stress test three things with clients — how much they’ll spend in retire­ment, how much they’ll save for retire­ment and the risk they’ll take in invest­ing those sav­ings along the way. For each of these you can cre­ate a base case and then exam­ine the impact of dif­fer­ent scenarios.

Stress test one: Spend­ing in retirement

Once you’ve cre­ated a base case (per­haps with a high spend­ing and low spend­ing sce­nario) you can stress test for the impact of higher than expected infla­tion (a grow­ing con­cern among some econ­o­mists due to the record lev­els of spend­ing by Gov­ern­ments around the world) and the effect of unan­tic­i­pated expenses such as an extended stay in a long term care facil­ity or nurs­ing home.

Stress test two: How much clients save before retirement

Many clients have already increased sav­ings lev­els and made the deci­sion to defer retire­ment. A recent sur­vey indi­cated 60% of Cana­di­ans are con­cerned about some­one in their house being laid off — you can stress test the impact of clients los­ing their jobs or earn­ing less part time income after retir­ing than expected.

Stress test three: The risk on savings

Given what’s hap­pened to mar­kets, many Cana­di­ans would pre­fer to avoid risk entirely … so you could start by stress test­ing a retire­ment plan for the impact of the 2% return cur­rently avail­able on GICs.

For most Cana­di­ans with­out guar­an­teed com­pany pen­sion plans, a 2% return means they’re almost cer­tain to run out of money in their 80s. You can do fur­ther stress tests at 4%, 6% and 8% returns– look­ing at the greater volatil­ity and risk that comes with each of those higher return lev­els and help­ing clients under­stand the trade­offs between risk and return.

You need to empha­size to clients this is not a sta­tic process, for this stress test­ing process to be remain accu­rate, it needs to be updated every year or two. The good news is that even if clients aren’t exactly where they hope to be, events in a year’s time may have changed so they are closer to their goals.

To read the full arti­cle, go to: http://​www​.the​globe​and​mail​.com/​g​l​o​b​e​-​i​n​v​e​s​t​o​r​/​i​n​v​e​s​t​m​e​n​t​-​i​d​e​a​s​/​f​e​a​t​u​r​e​s​/​e​x​p​e​r​t​s​-​p​o​d​i​u​m​/​t​a​k​e​-​a​-​s​t​r​e​s​s​-​t​e​s​t​-​o​f​-​y​o​u​r​-​o​w​n​-​p​o​r​t​f​o​l​i​o​/​a​r​t​i​c​l​e​1​1​8​7​9​64/

 

About ClientInsights.ca A breakthrough in client communication Not long ago, clients read what you sent them. Today that's changed. In the You Tube world we live in, many investors would prefer to hear from a portfolio manager directly. And instead of reading an article on tax saving or estate planning strategies, more and more Canadians would rather watch an expert discuss the topic. Clientinsights.ca was developed in response to these changes - to deliver information in the form that investors want to receive it. It provides over 150 short video interviews, each about 4 to 6 minutes - you can email them or watch a video along with clients to start a meeting. No matter how you use it, Clientinsights.ca is designed to help you take client communication to a higher level. Dan Richards Founder and CEO, Clientinsights.ca Read more from the author/contributor here.

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Tags: Base Case, Canadians, Company Pension, Financial Future, Gics, Globe And Mail, Globe Mail, Growing Concern, Long Term Care, Long Term Care Facility, Recent Article, Retirement Plan, Stress Test, Stress Testing, Stress Tests, Term Care Facility, Term Goals, Test One, Time Income, Volatility
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