If falling equity markets and a slowing economy have you wondering whether you can retire on time and in keeping with your plan, you’re not alone. Here’s what our experts recommend you do.
Call it a rude awakening or a painful reality check. Just about everyone is opening their investment statements and seeing a substantially different picture than they saw just a year ago. Although the decline in value may be temporary, it begs the question – can you still retire as planned?
Senior Consultant, Earl Kirchner, who works with employee groups throughout Alberta, says that this dip in the market has brought people back to reality. “As recent as July of 2008, people were thinking that the boom in the market could go on forever. Now, they are revising their expectations and more accepting of a more realistic rate of return,” explains Earl.
T.E. Wealth’s Financial Education & Employer Services has been pro-actively contacting employees that they have worked with to update their retirement projections. As Earl points out, “The most important thing is to know where you stand so that you can decide what to do.” He sees people looking to differ retirement by a year or two, or reducing the “extras” in retirement – travel and other non-essentials, for example.
Gilles Couturier, Regional Vice-President with T.E. Wealth in Montreal says that clients are making adjustments to their plans, both minor and major. The degree of adjustment really depends on how long they have until retirement and how much they will rely on personal savings for retirement income. “If you have five to seven years until retirement, the current market decline isn’t as big a concern than if you are planning to retire next year. Similarly, if most of your income is coming from a defined benefit pension plan and government benefits you have less reason to be worried than someone whose income is largely dependent on their RRSP and other investments,” says Gilles.
In the current environment, people are focusing on the risk of volatility but as Gilles points out the real risk to their retirement plan is the loss of purchasing power. At an assumed inflation rate of 3%, the purchasing power of money is cut in half in 25 years. Someone retiring at 60 with a retirement income of $60,000 per year will need at least $120,000 in annual income at age 85 to maintain his or her standard of living. “When assessing their retirement plan, people need to make sure their sources of income and invested capital can offset the increased cost of living – this is difficult to do if you rely only on fixed-income and short-term investments,” he says.
Terry Willis, Vice President at T.E. Wealth in Toronto, observes that clients are definitely considering different options – possibly working a little longer and perhaps not spending as much. To give his clients peace of mind, Terry has been forecasting different scenarios for them, examining the effect on their plan of a lower rate of return, reducing retirement income or adding in some supplemental income from part-time work. As Terry points out, “Supplementing income with some consulting work in the early years of retirement can leave your capital intact and give it a chance to recover from the current market downturn.”
Terry says that T.E. Wealth’s client portfolios are designed to weather market storms like this one and he reminds clients that they should feel confident over the long term – their plan will work out over time. “The reality is that the performance of our portfolios is much different from what people are hearing in the news,” explains Terry. Even so, he says it’s important that people be honest with themselves. They need to know where their sources of income will come from and make sure they can comfortably cover off any emergency needs. Retiring at age 55 may no longer be in the cards but a comfortable retirement should still be within reach.
Consultant, Carla Norris, who works out of T.E. Wealth’s Vancouver office, is finding that the people who are most concerned right now are those who have recently retired. With markets in decline, these people worry about depleting capital in a down market but, as Carla points out, that is what the fixed-income component of their portfolio is for. “You can take income from the fixed-income portion of your portfolio and avoid the possibility of locking in losses from equities,” explains Carla.
One of the necessary adjustments people should be making, according to Carla is rebalancing their portfolios. “When markets were up, people were reluctant to pull the growth out of equities and reinvest it in bonds but now they can see why that was important. Today, investors should rebalance to make sure their asset allocation is in keeping with their target asset mix, even if that means putting more money in equities.”
Another option that Carla has noticed some clients considering – sticking with their retirement plan and leaving a little less to the kids.
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