Achieving the retirement lifestyle you want requires planning and preparation.
Did you know?
What Canadians think are their greatest risks to their investment portfolio over the next 1 to 2 years:*
51% – rising inflation
41% – economic recession
35% – resurgence of COVID-19
33% – rising interest rates
32% – stock market volatility
A well-designed financial plan should help you manage a number of risks that may affect your income in retirement. Here are five risks to consider, their impact and potential strategies to address them.
1. Market risk
Markets go through cycles where prices will rise and fall. A prolonged downturn in the market can negatively impact your retirement plans if you’re not able to generate a sufficient investment return – or are forced to make withdrawals in retirement when your portfolio has decreased in value.
Spikes in market volatility, while unsettling for most, can prompt some to abandon their long-term plan for the short-term reprieve that cash and other liquid investments offer. When the temptation to retreat to the sidelines takes hold, ask yourself if the market or economic event fuelling the downturn changes your long-term goals? Odds are it doesn’t.
A well-thought-out investment plan can provide the discipline to ride out short-term volatility and help you to avoid reacting hastily. Keeping an eye on your long-term strategy will ultimately help you ride out short-term market uncertainty and ensure that you don’t derail your long-term investment success.
2. Inflation risk
While the impact of inflation on your investments isn’t usually felt in the short term, its impact can slowly erode the purchasing power of your long-term savings. As the price of goods and services increases over time, a higher amount of savings is required to maintain the same level of purchasing power in the future (e.g., retirement).
No one can completely avoid the effects of inflation. However, a sound investment strategy as part of your financial plan can help you maintain your purchasing power and standard of living in retirement.
Investing in a balanced portfolio, containing a mix of stocks and bonds, can help you hedge inflation and build wealth over time. This is due in large part to the strong returns earned by stocks, which have historically beaten inflation by a large margin. Your portfolio’s asset mix of stocks and bonds is a key determinant in meeting your long-term investment goals.
3. Longevity risk
Longevity risk refers to the possibility of outliving your savings. It can occur for a number of reasons – you might underestimate how much money you’ll need in retirement; your savings might not grow enough to cover your expenses; or you may live longer than anticipated.
For many, outliving their retirement savings is a very real risk, but one that can be managed with proper planning and the right balance of investments for each stage of one’s life.
Diversifying your portfolio to include a balance of conservative and growth-oriented investments has the potential to boost the value of your portfolio over the long run and combat longevity risk.
By investing in a well-diversified portfolio, you are spreading your money across a variety of investments that don’t all behave the same way during periods of market volatility. By not limiting your exposure to any one asset class, industry or geography, you can help lower the overall risk of your portfolio which can help you achieve your goal of being able to adequately fund your retirement.
4. Accelerated withdrawal of funds
If you withdraw funds from your retirement savings too quickly, this can dramatically affect how long your retirement savings will last.
To help ensure that your savings last for the duration of your retirement, careful consideration should be given to the rate at which you drawdown your retirement savings.
A common strategy is to employ the “4% rule.”1 The rule suggests that a portfolio invested with an equal allocation to stocks and bonds will last 30 years if the retiree withdraws 4% of their savings in year one and adjusts that amount annually at the rate of inflation. Speak to your Scotiabank advisor to see which rate is appropriate for you.
5. Increasing health care costs
As you get older, the likelihood increases for experiencing health-related issues and/or having the need for long-term care, which will add to your expenses.
It’s impossible to predict your future health care costs; however, if you’re currently suffering from chronic health conditions, such as diabetes or hypertension, you can plan for these accordingly.
To help you estimate your health care costs in retirement, it’s important to learn about the coverage that’s available – for example, through provincial health care plans or private plans. Some retirees have ongoing coverage paid by their employer or the option of continuing coverage at their own expense. Find out if your employer provides medical benefits for a certain amount of time after you’ve retired. If not, you’ll need to be prepared to set aside funds to cover medical costs, and potentially health insurance premiums for a private plan.
A Scotiabank advisor can help you build a financial plan to achieve the retirement you’ve always envisioned. Your unique plan will help identify potential risks and put strategies in place to address them.
Want to learn more about investing essentials?
Check out helpful videos available on scotiafunds.com/videos such as:
- Rethinking risk
- Mutual funds 101
- The value of asset allocation
- Weather the unexpected through diversification