This is certainly not the ideal time to retire. With stock markets faltering, interest rates and inflation rising, and a good chance of a recession next year, macro conditions couldn’t be much worse. However, those planning to retire soon shouldn’t despair. There are steps you can take to make the best of the situation – which may not be as gloomy as it seems.
“Current conditions shouldn’t trigger the same level of fear or panic as in the past,” says Brianne Gardner, wealth manager and investment adviser at Raymond James in Vancouver.
When it comes to a possible recession, Ms. Gardner notes that for high-net-worth individuals, and retirees with a comfortable nest egg, a recession can actually be a good thing. “That renovation on the house you have put off will become less expensive, or that trip will become more affordable as others will be tightening their belts on discretionary spending,” she says.
Ms. Gardner believes a more serious problem for retirees is inflation. “Someone living on a fixed income has seen their monthly expenses rise substantially,” she says. “Coming up with an extra $500 per month might seem like an impossible task for some.” As well, rising prices can erode the assumptions laid out in a retirement plan.
Ms. Gardner’s advice for those planning to retire in these volatile times boils down to six fundamentals: Pay down high interest debt; try to reduce spending; have some downside protection for your investments; have an emergency fund; be patient; and don’t try to predict the unpredictable.
“Your plan should account for market volatility and your strategy should be able to handle the downturns,” she says. “Have the discipline to stick to your plan even when it doesn’t feel like the right thing to do.” She adds that if you know you need cash flow or income for various expenses, build that into your plan so you don’t have to sell good assets at bad prices.
Another question for those retiring in these uncertain times is whether you need to change how you draw down assets – and what factors to consider to ensure your savings will still last. “The worst scenario is where you’re forced to sell an asset at a discount or lower price because you need the money to pay for something else,” says Ms. Gardner. She advises retirees who are taking withdrawals from their savings to keep about six to nine months’ worth of expenses in cash on the sidelines.
“If you plan on retiring in the next two years then absolutely this would be time to make some changes,” says Jason Del Vicario, portfolio manager at iA Private Wealth in Vancouver. To avoid any sudden crises, Mr. Del Vicario’s firm advises clients to set aside 24 months of retirement income in a high interest savings account. They review this every six months and ‘top up’ as necessary.
Another principle Mr. Del Vicario espouses is that retiring doesn’t mean you should have a completely conservative portfolio. “This ignores the threat of longevity risk,” he says. “If you retire at 65 then it’s likely your time horizon is 20 to 30 years!”
He notes this is an even bigger issue during periods of heightened inflation. “The only asset class that can, over time, hedge inflationary pressures is stocks,” he says. He adds that high-quality companies have the ability to raise prices and protect margins during inflationary periods and these should be the long-term investors’ focus over guaranteed investment certificates (GICs) and bonds, which feature fixed payments that can’t grow. “Holding a 4 per cent GIC during a time when inflation is 6 per cent or 8 per cent guarantees the loss of purchasing power of those dollars – not to mention, what happens if inflation continues to rise while your GIC or bond income is fixed?” he explains.
In terms of strategies for drawing retirement funds in this environment, Mr. Del Vicario says that if you’ve planned accordingly, then you shouldn’t have issues unless the economic downturn lasts more than two years. If that happens then you’d want to take advantage of bear market rallies to de-risk and move some money from stocks to your short-term income reserves, he says.
While there may be steps for retirees-to-be to take in the short-term due to the current environment, advisers recommend keeping a long-term view. “Remember not to extrapolate the big moves too far out in the future, as interest rates, inflation and market returns tend to normalize back to long-term averages over time,” says Maili Wong, senior wealth adviser and portfolio manager at Wellington-Altus Private Wealth in Vancouver.
She also recommends resisting the urge to make knee-jerk reactionary changes – including avoiding trying to time the market. She reminds investors to stay invested with an asset allocation that reflects the amount of risk and return you are willing to accept to meet your long-term goals.
To ensure your assets will last despite the negative factors currently at play, Ms. Wong recommends stress-testing your retirement plan under different, but realistic, assumptions for interest rates, inflation and rates of return.
Ms. Wong advises investors not to lose faith and not be rattled by the market’s ups and downs, even as they enter retirement. “The bottom line: Volatility is not new, and markets will eventually recover. Stay disciplined,” says Ms. Wong. “Embrace volatility – expect that you will experience at least a 10-per-cent draw down in equity markets, every year – at least once a year – and instead of fearing these, see them as a terrific opportunity to buy high-quality assets on sale.”