Getting retirement ready in turbulent times

Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.

For many pre-retirees or those entering retirement, the repercussions of COVID-19 and market turbulence have added new fears to their financial future. Yet this is the very time for these investors to carefully prepare for the future.

Ideally, that preparation should have begun earlier, according to Cynthia Kett, an advice-only financial planner at Toronto-based Stewart and Kett Financial Advisors. “Hopefully pre-or-early retirees would have done some retirement planning that would have helped them to know what their cash flow needs would be for the first years of retirement,” she says.

How much do you need?
Now is the time to assess cash-flow requirements. “One positive outcome of COVID-19 is that collectively, discretionary spending is down. People are now focusing on needs versus wants,” Kett notes.

Ask yourself, do you have sufficient resources to meet your needs? “Any extra cash that is available for lifestyle spending like travel, renovations, and large purchases, for example, can be deferred until the markets recover, which may take a little longer than we initially thought,” adds Kett. 

Based on three decades of experience, Kett says that people who seem to have the most difficulty transitioning into retirement have never really thought about what they want their retirement to look like. “Once you know what you want your retirement to look like, you can factor in the cost in order to maintain that lifestyle,” she says, adding that a detailed analysis of retirement income expenses is critical, especially for anyone within five years of retirement or semi-retirement.

The bucket approach
After a detailed assessment of finances, including tax-flow requirements, Kett likes to safeguard a client’s cash flow during retirement by suggesting one to two years’ worth of cash or cash equivalent in investments that are liquid and accessible. She suggests the remainder of the portfolio be diversified with fixed income and equity investments. As always, an individual’s age, longevity, risk tolerance, and financial needs are essential considerations when determining the most suitable mix of assets.

Morningstar’s director of personal finance, Christine Benz, agrees that having a safe haven of true cash is especially prudent. She favours the time-tested idea of the Bucket approach, crediting Harold Evensky, a successful financial planner in Florida, for the concept. “This idea of safeguarding retirees’ near-term cash flow needs can help retirees stay the course and make peace with the volatility,” Benz says.  

Benz favours a three-bucket portfolio, starting with a couple of years’ worth of portfolio withdrawals in true cash. “And then from there,” says Benz, “I’ve stepped out of the risk spectrum. I’ve got a Bucket 2 that is composed mainly of high-quality, short and intermediate-term bonds that houses another, say, eight years’ worth of portfolio withdrawals.” Then Bucket 3 is invested in suitable, diversified investments, including equities, to grow the portfolio.   

Don’t write off equities
Kett points out that people have to think long-term with their investment portfolio, since if you retire at 65, you may have another 30 or more years of living. A lot of people are living past 100. For the growth and inflation protection part of a portfolio, you need to be invested in global equities to deal with that sort of 30-year plus time horizon, she adds.

“Markets and people are resilient, both will eventually recover,” says Kett. “However, there’s no question that those who have not planned their resources for retirement may need to work longer or semi-retire and scale back in order to supplement their income, or at least until their finances are back on track.”

Keep an eye on income streams
Now is also the time to plan for when you want to start receiving CPP and OAS, and when to start your RRIF withdrawals. With respect to converting an RRSP to a RRIF, you need to factor in your cash flow requirements, when you need to cash out, and what you are going to cash out so you are not selling investments in a down market. 

For example, for current retirees who are required to make minimum RRIF withdrawals, the minimum withdrawal amounts have been reduced by 25%. “Consequently,” says Kett, “seniors who can take advantage of this measure can reduce their projected 2020 taxable incomes.” They’ll also be able to avoid unnecessary withdrawals from their RRIFs while their portfolio values are down.

According to Roy Vokes, a certified financial planner with Agora Financial Services in Nobleton, Ontario, deciding on the best time to take government benefits, “is like going down a rabbit hole, it’s a tough one.” So much depends on an individual’s financial situation and their personal preference. 

“My normal go-to situation is to look at the situation from a tax perspective and decide what makes the best sense. In my personal situation, my wife took her benefits at 60 and I’m probably not taking them until I’m 65, but I’m not going to wait any longer than that,” he says.

Delaying government benefits to receive increased payments may not work out to someone’s advantage if they experience impending health issues and shorter longevity, for example.

What happens next?
“All retirement planning is based on two questions – 1. How much are you going to spend, and 2. When are you going to die? Everything else is guesswork based on how much you’ve got in front of you at the time, and that’s why I start with their tax situation,” Vokes says.

Both Kett and Vokes echo that this is also the time for “getting your house in order” with respect to estate planning and risk management. Those measures include making sure you have a will, house insurance, travel insurance if you travel, and powers of attorney.

Maintaining a broader perspective, Vokes reminds investors that market downturns and volatility are normal circumstances and pre-or-early retirees should safeguard fluctuations with an appropriate balanced portfolio. “Don’t let panic take hold,” says Vokes. “No downturn is the same as previous but every downturn has been followed by an up market and that is true 100% of the time. Concentrate your daily efforts on things where you have control and try to keep your investments flexible and diversified enough to withstand uncontrollable events.”