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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.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/take-a-stress-test-of-your-own-portfolio/article1187964/
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.
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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