Sometimes we make a plan and, in the end, nothing goes as planned. This is the case for many people nearing retirement right now who watch with dismay the decline in the value of their investments. What to do ?
The situation
André* and his wife, Nathalie*, are 60 years old and they plan to retire in three or five years. Their plan seemed to be working well, until the stock market went into a tailspin. Their portfolio has shrunk by 10% in 2022. And it doesn’t seem to be over: the couple are worried about inflation, global conflicts and the looming recession. “The decline in the markets calls into question our retirement plan, especially since we know that the last stock market corrections took a long time to subside,” worries André.
The couple’s investments are all subject to stock market fluctuations ranging from moderate to high risk. André and Nathalie also plan to invest annually over the next three years $5,000 each in a registered retirement savings plan (RRSP), $5,000 in a tax-free savings account (TFSA) and $5,000 in the Fonds de solidarité FTQ no checked in.
“But, according to some experts, the key rate could still be raised, which could make it possible to have safe investments such as guaranteed investment certificates [CPG] RRSP or TFSA at 5% or 5.5% interest, says André. Should we migrate some of our money to this type of investment? What would be the best strategy, considering the time we have left before our retirement? »
Numbers
Andrew
Annual salary : $65,000
RRSP : $374,000
TFSA : $41,500
Non-registered investments : $35,000 (Solidarity Fund QFL)
Savings account : $25,000
QPP : $14,000 (estimated at age 65)
Natalie
Annual salary : $70,000
RRSP : $360,000
TFSA : $54,000
Non-registered investments : $34,000 (Solidarity Fund QFL)
Savings account : $25,000
QPP : $14,000 (estimated at age 65)
Annual lifestyle of the couple expected to retire : between $70,000 and $75,000
The cycle of emotions
When the markets are down, it is completely normal for some people to experience anxiety and that some may be tempted to make costly decisions by getting carried away by emotions, according to Julie Paquin, financial planner and Vice-President, Private Management, at Optimum Gestion de Placements Inc.
This year is particularly testing investors’ risk tolerance as equities and bonds decline, something not seen since 1994. This is not trivial.
Julie Paquin, Financial Planner and Vice-President, Private Management, at Optimum Gestion de Placements Inc.
“Especially since the years before, the markets had been rising for a long time,” she adds. It is for this reason that it is necessary to be well accompanied by an advisor who will put things in perspective. »
It is crucial first of all to be able to refer to a retirement plan made by considering one’s objectives, one’s investment horizon and one’s risk tolerance.
PHOTO ROBERT SKINNER, LA PRESSE ARCHIVES
Julie Paquin, financial planner and vice-president, private management, at Optimum Gestion de Placements inc.
“We have to stay true to it despite periods of turbulence,” says Julie Paquin. It’s normal to experience declines when investing in the stock market and historically, they have always been followed by increases. »
Take advantage of rising markets
While André plans to take money invested in stocks to buy GICs, Julie Paquin sounds the alarm. “First, by selling shares when they are at their lowest, André and his spouse would cash in their loss and in addition, they would not be able to take full advantage of the market recovery,” she explains.
She gives the example of $10,000 invested over 20 years (between 2002 and 2022) in the S&P 500 stock market index. We are talking about an annual return of 9.4% to reach $60,000. If the investor had become discouraged and pulled out his money temporarily and that would have caused him to miss the best 20 trading days, his return would have been 2.51%, for a total of about 17,000 $.
Opt for investments with attractive returns
Although the past is no guarantee of the future, it is also interesting to compare the long-term returns of GICs with those of bonds and equities.
“Someone who invested $1,000 in a five-year GIC 22 years ago and constantly renewed it at maturity would have about $1,600 today,” says Julie Paquin. A balanced portfolio would have yielded much more because stocks and bonds had better long-term returns. As of November 15, we’re talking about $1,750 for global bonds, $2,500 for Canadian bonds and just over $4,000 for Canadian and US equities,” says Julie Paquin.
The financial planner specifies that it is also important to look at the return over the long term, that is to say five years and more. She calculated that with a balanced portfolio (50% fixed income and 50% growth) which has a return net of fees estimated at 4.6% according to the standards of the Institut québécois de planification financière, the couple achieved their goal of retirement at age 65 with a cost of living at $75,000. “On the other hand, by modifying the return on the portfolio for the years to come to 3%, the couple would no longer have any funds at age 87,” she specifies. However, André has a 50% chance of still being alive at 89 and Nathalie, a 50% chance of still being alive at 91. »
The importance of planning cash
Of course, André is particularly worried because he will be retiring in the next few years. “But he won’t get all his money out at once! exclaims Julie Paquin.
The couple must therefore simply organize themselves to have enough cash when they need it. He already has an emergency fund: André and Nathalie each have $25,000 in a savings account. “We recommend having the equivalent of three to six months of expenses as an emergency fund, depending on the situation of the people, says Julie Paquin. Right now, it’s worth putting that money in a high-interest savings account, and the rest should be invested in their portfolios for retirement. »
Then, they can plan cash flow for about one retirement year at a time, says the financial planner. “For these funds, it is to their advantage to opt for investments that are safe and accessible at all times,” she advises. Thus, I would not recommend GICs because they are non-redeemable. For example, they could opt for money market funds or a high-interest savings account. »
To avoid selling declining investments in order to plan for the cash required for their cost of living in their first year of retirement, Julie Paquin advises the couple to make their next RRSP and TFSA contributions instead with this strategy in mind.
“Thus, their portfolios will remain invested and this is important, since maintaining one’s investment strategy rain or shine is one of the factors of investment success,” she says. Then, they will be positioned when the markets recover. »
To make the best choices over the long term, the couple really benefits from having a detailed disbursement plan drawn up by their advisor. “It’s important, because disbursement strategies have a big impact on the longevity of capital,” says Julie Paquin. The sequence of withdrawals is very important. »
* Although the case highlighted in this section is real, the first names used are fictitious.
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