Stock markets around the world have depressed, scared and concerned a lot of people. Anyone that has money in the markets has felt the risks of stock market investing.
For most people, the advice coming from the financial industry is hang in there and eventually things will come back. While this may be true in most cases, retirees drawing income from their portfolios may not have as much time to wait.
Elizabeth is 66 and has been retired for the past 3 years. Although she has a small pension, she converted her RRSPs to a RRIF to supplement her retirement income. Like many retirees, when she converted to a RRIF, she did not make any changes to her investments. All of it remained in a managed portfolio of mutual funds. Her advisor described her portfolio as ‘fairly conservative’ with 40% of the portfolio in bonds and 60% in pretty blue chip stocks. Elizabeth’s advisor set up a systematic withdrawal plan to create regular monthly income.
A systematic withdrawal plan (SWP) is an investment strategy where retirees take out a systematic amount of income from their portfolios. Typically, the income is created by selling enough units of investments. When markets cause portfolios to drop, taking income means there is less money to help recover when markets rebound. Mathematically, drawing income when markets are down reduces the longevity of a portfolio. In other words, it increases the risk that the portfolio will run out of money.
It’s not fun advice to give but retirees like Elizabeth, drawing income from their portfolios should take a look at their income needs and see if it is feasible to either stop withdrawals or reduce their income. Minimizing withdrawals during turbulent times can reduce the longer-term risk of running out of money. Elizabeth has decided to stop the monthly income for a while and just live off her pension, Canada Pension and Old Age Security.
Les is also 66 and retired. Just like Elizabeth, Les converted some of his RRSPs to a RRIF three years ago to create retirement income. However, when Les did this, he only converted half of his portfolio to a RRIF. The RRIF was invested into a GIC RRIF for 5 years. The rest of his RRSPs stayed in a balanced portfolio of mutual funds.
Retirees can learn from what Les did. Although Les has felt the pains of the markets in his RRSP portfolio, his RRIF is unaffected. By the time, Les has to convert the rest of his RRSPs to income, hopefully, the markets will have had a chance to rebound. Les does not have to cut back his lifestyle to accommodate the uncertainty of the markets.
My two cents
It’s times like these that remind us about how important guaranteed investing is in retirement. For the past 15 years, we’ve seen a mass movement of money from guaranteed investments to non-guaranteed alternatives like stocks and mutual funds. If you think about it, markets are unpredictable and you can’t control them. As a result, investors who have more market-based investments have less certainty and control in their portfolios. Retirement is a time when you want more control and more predictability so retirees need to re-think how they invest their money.
For those retirees that currently have too much risk in their portfolio, now may not be the best time to get out of markets and back into guarantees. Instead, they may be better off reducing their withdrawals in the short term. Once the recovery comes, whenever that may be, the key is to never make the same mistake twice. In other words, remember that markets will fall from time to time and sometimes it can be really painful.