Keeping two to three years of living expenses in an easily liquidated investment can help individuals who are close to retirement weather the storm of a market downturn.Getty Images
For many Canadians nearing retirement, the last several years have felt financially nerve-wracking, marked by increased job insecurity, a rising cost of living and constant threats of recession.
Shamez Kassam, a chartered financial analyst based in Calgary, says that he’s been hearing from clients more about how they are stressed about the state of the economy and how it will affect their retirement.
“From an equity market perspective, valuations are at the higher end,” says Mr. Kassam, a portfolio manager at Designed Wealth Management. “It’s a fairly critical time for preretirees and retirees.”
High valuations increase the risk of a market correction, which could reduce investment returns at a time when investors need to shore up their retirement income. That’s especially relevant as prominent voices in the media warn of an AI-fuelled equity market bubble and muted stock market growth over the next decade.
Amid this uncertainty, experts say there are adjustments investors can make to help protect and grow their retirement savings.
“Life is uncertain, but there are some levers that you can control,” Mr. Kassam says.
Save on fees
Spending, investment choices and investment fees are three areas where investors can find savings, Mr. Kassam says, and that can translate into more money for retirement.
“I find that investors generally in Canada underestimate the impact of what costs do to returns over time,” he says.
Mr. Kassam gives the example of someone with $1-million in their portfolio who is able to find a savings of 1 per cent per year on fees.
“You’re saving $10,000 a year,” which is a notable amount when thinking about one’s lifestyle in retirement, he says. People who invest through major banks or other higher-fee arrangements can find this kind of savings if they move to lower-cost investments, he adds.
For individuals approaching retirement, Mr. Kassam suggests keeping two to three years of living expenses in an easily liquidated investment so they can “weather the storm” of a market downturn and avoid making big changes to their nest egg at such a critical time.
“It gives the rest of your portfolio time to recover,” he says.
Play the long game
Kun Huo, assistant professor of accounting at the Ivey Business School at Western University in London, Ont., says it’s crucial to keep a long-term perspective on savings, even during tough times in the market.
He says he’s known many people who pulled their money out of investments as the market was tanking, only to fail to get invested again in time to realize the dramatic gains that can come after a dip.
“The biggest rises in stock markets tend to follow the biggest drops,” Dr. Huo says. “More money is lost waiting for a correction than from the correction itself.”
Dr. Huo is an advocate for using accounting principles such as balance sheets and depreciation schedules to plan out finances over the long term. He points out that tracking expenses now can help individuals project how much they will need in retirement.
Other tips include renegotiating debt when interest rates fall and always retaining some liquidity to earn interest on cash when rates go up.
Watch for pension pitfalls
Janea Dieno, a certified financial planner with Brightrock Financial in Saskatoon, says the growing gap between income growth and the cost of food and other necessities is affecting many Canadians’ ability to save.
She’s seen numerous clients take on new jobs with higher salaries to stay on track with their retirement savings but cautions that job changes come with pension considerations. When individuals are nearing retirement, it’s important to compare total compensation, not just salary, when considering a new role, and to find out when the pension starts at the new job.
“Often, the pension doesn’t start for three months, six months or a year,” says Ms. Dieno. That puts the onus on the individual to invest the amount of money they would normally be saving in their pension if they want to retire at the same time as they planned.
For example, if a former employer had been pension-matching at 5 per cent of a worker’s pretax salary, Ms. Dieno recommends they put 10 per cent of their income away until the pension kicks in, then scaling it back to the 5-per-cent contribution afterward.
“That might get you a couple extra years of retirement life,” she says. “Instead of retiring at 60, you might retire at 58.”