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Pattie Lovett-Reid: Retirees, it's time to replace panic with process
This is an undated file photo of a senior citizen. (Andrea Piacquadio from Pexels)
TORONTO -- It is so hard to even comprehend - many have worked for decades and managed to diligently tuck some money away for their retirement only to find in a matter of weeks their portfolio has lost a third of its value due to COVID-19.
In a recent survey by Edward Jones, 53 per cent of Canadians said they have seen their retirement savings affected by the pandemic. While Canadians 55+ were the most affected at 55 per cent, 46 per cent of those between 18-34 also cited an impact on their retirement savings as well.
It is devastating.
One recent retiree reached out to me and said they had saved $750,000 for retirement and after losing $140,000 through the market meltdown, they cashed out of their investments and locked in their loss. No question it was a lot of money to lose but they couldn’t sit idle and watch their portfolio dwindle further. They hope to make that money back over time but for now in their words “they are sleeping better at night.”
Retirees and pre-retirees are worried and anxious about the impact the pandemic is having on their retirement plans. Even prior to the pandemic the number one question I was asked was: “How will I know if I have enough money to see me through my retirement?”.
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It is an important question to ask.
The reality is we could live a third of our life in retirement and a lot can happen to derail your plan at the best of times. Inflation could creep higher, health-care costs could accelerate, you could live too darn long and the obvious one we are experiencing, the markets could have a significant pullback and your portfolio decimated.
When your financial foundation is rocked, the immediate reaction is to wonder what the heck are we going to do now?
The first thing is not to panic. There are elements of your financial life you can control.
- Begin by reassessing financially where are you today. It is important to understand very clearly how much money you have coming in and what it is you are spending your money on. Cut out the daily market noise. Your focus is your plan and your retirement goals. This is not time for guesswork. This is the time for razor-sharp precision. By not knowing your actual numbers you create an unnecessary level of stress in your life. During periods of volatility, even on a temporary basis, pulling back on discretionary spending helps to reduce the potential of overspending and outliving your money.
- Ensure your portfolio is balanced. Balanced refers to having cash, bonds and stocks in your portfolio. Retirees ideally have a full year’s living expenses in cash so they don’t have to sell any of their investments at exactly the wrong time. In other words, when markets melt down. Bonds are an important staple in your portfolio but stick to high-quality companies. Companies that have little debt and strong balance sheets. They may pay less in yield then riskier bonds (often referred to as "junk bonds") but you stand a better chance of getting your principle back when it matures. Now is not the time to chase returns or to take on more risk trying to make up for lost ground.
- You should have some money invested in the markets. Stocks will offer growth potential and that in turn will help you keep up with inflation, preserve your purchasing power and provide some upside potential. Some in retirement fear buying stocks and prefer to sit in cash. I would argue if you sit in cash after you pay your taxes on any income generated in your account and if inflation creeps up you will actually be losing more money than you thought. Try to always think in after-taxes and after-inflation dollars. A word of caution, if you do hold individual stocks, here too you may be taking on more risk in your portfolio than you should. Now might be a good time consider investing in broadly diversified, low-cost index funds. You reduce your risk by having exposure to a basket of stocks rather than one company.
The bottom line: how much money you will need in retirement is driven by what sort of lifestyle you hope to enjoy. Controlling what you can, how much you are spending, and how much risk you have in your retirement portfolio can all be altered to meet the current environment. Recouping losses is going to take time. However, a gentle reminder, you could spend a long time in retirement. So if you have lost money in your portfolio you likely still have time on your side.
Once the panic is replaced with process and fact, as difficult as it may seem, this is your time to spend and not only save. You have earned that right.