In the wake of one of the worst bear markets in post war history, seniors have found disappointment and losses.
In the last decade, seniors flocked to ‘non-guaranteed’ investments in hopes of finding better returns. Today, they remind themselves that they are not gamblers and they feel like they do not have the time to take risks when it comes to investing. Instead, they opt for safe, conservative investments like GICs, Canada Savings Bonds and money market funds. This was easy to take when interest rates were 18% in the early 1980’s but in today’s markets, GIC rates are 75% lower. When your income gets cut by 75%, you are forced to look at different investment alternatives.
Seniors hate to lose money but also can’t afford to invest at rates of 3 to 5%.
Depleting your capital
One of the biggest problems conservative investors face is the potential depletion of capital.
Let’s say you are used to a 7% return or you simply desire a 7% return on your money. One of my 62-year-old clients recently said to me “I’m not greedy. If I could get a 7% return, I would live off the interest and protect my capital.” This is not the first time I have heard a statement like this from investors.
Here’s the problem. On a $100,000 RRIF, this scenario would generate a $7000 per year income. If we apply current rates of say 3% instead of 7% but kept the same level of income ($7000 per year), our capital would be depleting and would only last half as long.
With low interest rates today, seniors who desire to remain conservative will face either less income or depleting capital.
People are living longer
To magnify the problem even more, how many times have you heard a financial advisor preach the merits of long term investing? The reality is most people do have more time than they think. At age 65, you may be retired for another 20 or 25 years. Life expectancy is increasing with the advances in technology and health science.
Be careful of worrying too much about not having enough time. In most cases, it has less to do with time and more to do with patience.
Solutions to the problem
If you are conservative investor and you are facing the dilemmas of lower interest rates and how to invest your money, consider some of these strategies:
- Get some help. One of the most basic functions of a financial institution or advisor is to help you grasp the bigger picture. Everyone should take the time to see what they have, how much income they need and how long that money will last based on rate of return assumptions.
- Diversify. It has been proven scientifically that efficient diversification can dramatically enhance returns and reduce different forms of risk. The bottom line is that you can still look for conservative alternatives to GICs to enhance returns like Bonds, balanced funds, blue chip stocks, etc. The key diversifying and having too much of any one thing can create problems.
- Look at after tax returns. Tax plays such a significant role in Canada. Be sure to look at after tax income instead of pre-tax income. Often little changes to your investments can dramatically increase your after-tax income.
- Keep some perspective. I just want to share with you a real life example. Joe was 67 years old and had more than enough money to live on. In fact, in some of the projections, I used a 3% return and Joe never faced the risk of running out of income or capital. Joe’s two adult children were financially successful on their own. Psychologically, Joe wanted to earn the best returns possible but realistically, he would be fine with boring, inefficient GICs. There is a difference between wants and needs and that must be taken into account.
The reality is we must not lose sight of what investing is all about. Nobody likes to lose money but fluctuations and bear markets are normal parts of the cycle. While your heart may tell you to move to GICs, the low interest rate environment will create other problems and other risks. Make decisions with logic and rationalism instead of emotions.