The biggest fear for many Canadians in or near retirement is outliving their savings. This is followed by the fear of their purchasing power being eroded by inflation, and prolonged illness or disability. All are complex issues that makes investment decisions frustratingly difficult for anyone envisioning retirement.
Having to make these decisions with limited time on their side sums up the issues many retirees face today. We affectionately call this the ‘retirement risk zone’ and you can watch a good video explanation here.
Many investment solutions for retirees seem to be limited to low-risk strategies such as income funds, conservative balanced funds or money market funds.
It’s easy to calculate how long your money will last using a set withdrawal rate and a fixed return. Unfortunately markets don’t work this way. A study by Professor Moshe Milevsky, found that the sequence of returns had a huge impact on portfolio sustainability. The market meltdown in 2008 was a prime example of how bad markets in the first year or two of retirement can have a very negative impact on retiree’s savings. In some cases it could be better to invest more conservatively early in retirement then more aggressive later on.
Sometimes we need someone to point out to us that continuing to spend beyond our means could make our retirement plans unrealistic. A good financial advisor will not sugar coat a situation. A good start is to review assets, net worth and cash flow needs, then find what changes are needed to get out of the red.
Lost income could be made up by working longer. Working from home might be an option if commuting to a job isn’t desirable, or possibly start a consulting business. Some might consider renting out part of their home for extra income. Downsizing to a condo could free up equity capital, as well as lower property taxes and maintenance costs. The positives of this might be not having to mow the lawn or shovel the driveway any more.
Historically, investment advisors have used asset allocation models to provide income and portfolio stability. But in this era of higher market volatility and low interest rates, it’s necessary to consider new investment strategies for better income solutions. It now requires us to look at product allocation, which is a mix of investment products such as segregated funds, annuities, and mutual funds or stocks. A proper product allocation mix can provide sustainable, guaranteed lifetime income as well as liquidity for our retirement years.
No-one can live on 2.5% interest income from a 5-year GIC. Today there are investment alternatives that offer the principal protection you expect from a GIC portfolio but with guaranteed income that no GIC can provide. An unregistered life annuity can provide tax efficient cash flow as long as depleting capital isn’t an issue.
Take the time to review different investments and products with a trusted financial professional. It could be time well spent that could help stretch your retirement income and to make sure your money lasts as long as you will!
Image credit, Manulife