The primary concern for most Canadians in retirement is making sure their money is going to last. Retirees today are already facing big challenges. With interest rates at historic lows, GIC’s and other guaranteed investments are producing negative returns when inflation is factored in. This is one of several risks that would have been unthinkable not so long ago.
Having a clearly laid out financial strategy is a good start but even the best-laid retirement plans can fail as a result of unexpected events. Many potential risks are completely out of your control. Understanding those potential risks and considering them in the planning stage, however, can help to ensure that they are mitigated and properly managed.
How do you handle the unexpected? Be sure to consider how you would handle potential emergencies, such as home repairs, unexpected medical bills, or family emergencies. Setting up an emergency fund in an easily accessible account is a good start.
What if you need assistance? Consider the extra expense incurred if you need long-term care, assistance at home, or special housing. Monthly rent for a standard space in a private retirement home in Ontario can be north of $4000.
Will tax rates stay the same? The federal deficit this year could be in excess of $350 billion. This money will need to be paid back at some point. Nobody knows for sure exactly how the government plans to do this but higher taxes in one form or another seem probable. Stress test your retirement plan by running future income projections assuming higher tax rates.
What if you live longer than expected? Longevity is a big risk to potentially out living your savings. This is especially true for women who typically have a longer life expectancy than their male counterparts.
What about inflation? What if we go through another period as we saw in the ‘70s and ‘80s when inflation regularly exceeded 10% per year? With all the current government stimulus it very well could happen again.
Could your CPP be reduced by delaying it? The popular opinion suggests that delaying CPP results in a larger overall pension. It gets more complicated than that, however, as the pension is calculated on career average earnings. If you experienced many years of low or no contributions, the average earnings and subsequent pension are reduced.
Are your investment fees too high? Many Canadians are still invested in mutual funds paying 2.5% in fees each year, which is grotesquely expensive. On a $500,000 portfolio, that is $12,500 per year. A 1% savings on fees would amount to $5,000 per year or $100,000 over a 20-year period. If this applies to you, make changes now.
Can you handle a down market? Make sure you clearly understand your appetite for risk and how your retirement portfolio is invested. As we have just witnessed with the COVID-19 pandemic, financial markets can decline significantly and quickly. Losing your nerve and “panic selling” can have dire consequences in the long run. Having a trusted advisor as a voice of reason can be crucial.
What about the sequence of your investment returns? Financial outcomes can change dramatically depending on when and how you begin to draw on your portfolio. The long story cut short: if you start drawing on your portfolio in a series of negative return years you stand a significant chance of outliving your savings.
Nobody has a crystal ball but working with the right team of professionals and factoring mitigation into your retirement plan will optimize the chances of a long and happy retirement doing the things that you love – travel, social events and spending time with your loved ones.
Take care of your health as best you can. And nurture a network of family and friends who you will help if they get in trouble, and who can help you out if and when you need it.
Family Wealth Advisor
Bellwether Family Wealth
170 The Donway West, Suite 205
North York, ON
Chris is a Family Wealth Advisor with Bellwether Family Wealth and helps his clients reduce their tax bills, ensure their estates are set up correctly and retire in comfort with a steady stream of income for life.