Life can take on new meaning at retirement, but so too can worries about whether your nest egg will sustain the life you envision. While the recent market declines caused by COVID-19 have been unsettling for many investors, it can be even more so for retirees when they see the value of their nest egg shrink when they need it most.
By recognizing short-term market uncertainty for what it is, you can help ensure that it doesn’t derail your retirement plan. Here are five tried and tested principles that can help you gain needed perspective and enjoy the well-earned fruits of your labour.
1. Take care of the essentials
One strategy employed is to use the income from government or private pensions to cover the essentials – food, shelter and other necessities. This can help reduce the impact of market volatility on your day-to-day income requirements.
2. Think short term and long term
Holding a portion of your portfolio in cash or other liquid investments can help because you won’t have to sell longer-term investments in a declining market and can participate in the recovery. But while cash is key for the short term, you still need to grow your nest egg to take you through your retirement – which can easily last two decades or more. A Scotiabank advisor can help you ensure that your asset allocation is still in line with your time horizon, investment objective and risk tolerance.
3. Review your withdrawal rate
Determine if you need to reduce the amount you regularly withdraw from your retirement account in order to help preserve your capital longer.
4. Seek out alternative income streams
Taking on a part-time job or renting out a property are great ways to receive income outside of your portfolio and supplement your retirement income, while helping you ride out a temporary market downturn.
5. Keep calm and carry on
Investors generally feel a financial loss about twice as much as a gain of the same magnitude.* Understandably, many of us experience a roller coaster of emotions when investing, which can translate into poor buy-and-sell decisions. Being aware of these emotions during times of volatility will help you stay on the straight and narrow.
Additional investing tips
Tip 1: A big concern in retirement is running out of funds too soon – and if you encounter volatility, particularly during the early years, it can negatively impact your portfolio. One solution is to use a “cash wedge” strategy. It involves having cash readily available to cover a year’s worth of expenses, and then having another portion of your savings in shorter-term investments for an additional year or two of expenses. The rest of your savings are allowed to grow over time. This way if markets happen to fall, you can use your cash wedge to cover expenses and then use the shorter-term investment to replenish your cash. On the other hand, if markets rise, a portion of your longer-term investments can be sold instead to replenish your cash. A Scotiabank advisor can help with this strategy.
Tip 2: Consideration should be given to the rate that you withdraw from your retirement accounts. A common strategy is to employ the “4% rule”**. 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.
Staying invested during market ups and downs during your retirement years is simple – but not always easy – and requires different considerations than in your working years. Contact your Scotiabank advisor today to ensure your plan continues to make sense for you.
* Source: Kahneman, Tversky (1979, 1992).
**Bengen, William P. (October 1994). “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning: 14–24.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.