Five key retirement risks

Achieving the retirement lifestyle you want requires planning and preparation. You also need to account for possible retirement risks, meaning risks that can impact how financially secure you are during your retirement years. 

Here are five retirement risks to consider, how they might impact your hard-earned retirement savings and strategies for addressing them.

Markets naturally rise and fall—that’s part of investing. While you’re still working and building your retirement savings, you likely have time to recover if the market drops. But that’s not always the case if a market downturn happens when you’re retired or about to retire.

A prolonged downturn in the market can decrease the value of your portfolio when you need it most. This can have a negative impact on your retirement plans if you can’t generate a sufficient investment return or if you’re already making withdrawals.

Market volatility can lead some people to abandon their long-term investment plan for the short-term reprieve cash and other “safer” investments offer. While some investors are able to handle larger swings in the value of their investments, others may become nervous when the markets dip.

A critical factor in building a successful investment plan is having one that reflects your risk profile, which is your willingness and capacity to tolerate risk as part of your overall investor profile. Determining your risk profile is important because if you take on more risk than you’re comfortable with, you might panic during a market downturn and sell at the wrong time.

Diversification is also an essential strategy for long-term investment success that can help lower the impact of market declines on your portfolio. Diversifying your portfolio across a variety of industries, company sizes, geographic regions and varied types of asset classes can help manage market risk and improve return potential over time—essentially, by not putting all of your eggs in one basket.

If a downturn has you tempted to retreat to the sidelines, ask yourself this: Has the current market cycle—or the economic event fuelling the downturn—changed your long-term goals? Odds are, the answer is no. Ultimately, keeping an eye on your long-term strategy will help you ride out short-term market uncertainty and ensure you don’t derail long-term investment success.

A Scotiabank advisor can help you determine or update your risk profile and ensure your investment portfolio is aligned with it. They’ll also help you take advantage of diversification to help protect your investments during market downturns while potentially generating higher risk-adjusted returns. 

Inflation affects your finances both now and in the future. In the short term, rising prices can strain your budget, and over the long term, it can erode the purchasing power of your investments.

Even modest price increases add up over time, meaning you’ll need more savings to maintain the same standard of living in retirement.

Unfortunately, you can’t avoid the effects of inflation—no one can. But having a sound investment strategy 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 manage inflation risk and build wealth over time. Stocks have historically outpaced inflation over the long term, helping to grow wealth and offset rising costs, meanwhile bonds help provide stability and income. Together, the right mix of these assets (in accordance with your investor profile) can support long-term growth and help you stay on track with your retirement goals.

Scotiabank offers a wide range of portfolio solutions that invest in a diversified mix of assets—such as stocks, bonds, and even alternatives. These portfolios are actively managed and continuously adjusted to help control risk, including inflation risk, to support your long-term investment goals. 

Longevity risk refers to the possibility that you may outlive your retirement savings. In other words, you may not have sufficient savings to last all of the years you live.

Thanks to advancements in medicine and health technology, the average life expectancy for Canadians has risen to 81.6 years.² That makes longevity risk even more real for people who:

• Underestimated how much money they’d need in retirement
• Had investments and other savings that didn’t grow as much as expected
• Are healthy and 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, the right balance of investments, and an investor profile that aligns with your goals.

Investing in a thoughtfully diversified portfolio that includes 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’re 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. 

Withdrawing funds from your retirement savings too quickly can affect how long your retirement savings will last. It’s understandable to want to travel and do the things you put off during your working years, especially while you’re healthy.

Many people look at their retirement years in stages, acknowledging that their activity level will decline with their health. Still, spending too much when you’re first retired may not leave enough for your final years, when health-related expenses can add up.

To help ensure you’ll have enough money to last through retirement, your retirement planning should take three items into consideration:

1. Your anticipated income sources in retirement, such as, but not limited to, the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), Old Age Security (OAS), workplace pension plans and  registered and non-registered accounts.
2. Your current expenses and estimated future expenses, to help estimate how much you may spend in retirement, while also identifying debt or expenses that can be reduced or eliminated before you retire. 
3. An estimate of your future health care costs, factoring in any government or employer benefits you’ll still have access to once you’re no longer working. 

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. While no one can foresee the future, it’s wise to proactively plan for these health care costs now, so you’re not surprised later.

Whether you have a chronic health issue, like diabetes or hypertension, or are currently in good health, you’ll probably have out-of-pocket health care costs in retirement. It makes sense to plan for these accordingly.  

It’s impossible to predict what the future holds, both for health care costs and your own health. But you can estimate what health care may cost in retirement.

Start by learning about what health care coverage is available to you, such as through provincial health care plans. If your employer offers extended health benefits, see if they continue coverage during retirement or if you can pay for coverage at your own expense. If not, it’s suggested to set aside savings for unforeseen medical costs and potentially to pay for premiums for a private health insurance plan.

You can prepare for retirement risks, such as market risk, inflation risk, outliving your retirement savings, withdrawing funds too quickly and health care costs, by having a retirement income plan.

A retirement income plan acts like a financial roadmap designed to give you an accurate picture of your cash flow throughout your retirement years. Having a solid retirement income plan can help you nip retirement risks in the bud or at least lessen their impact on your savings.

A Scotiabank advisor can provide you with retirement income planning advice that will help set you on the path to achieving the retirement you’ve envisioned. It all starts with a simple conversation.