Pattie Lovett-Reid: Low rates a challenge for retirees
If you are five-to-10 years out from retirement, or you are in retirement, you need to know your personal financial numbers. Given the market volatility associated with COVID-19, it is time to stress test your portfolio.
The question you need to have answered is: Will I outlive my money? How much money you need in retirement is driven by the lifestyle you hope to live, supported by the various revenue streams you have to fund it. For example, you may have government pensions, a company pension, a tax-free savings account (TFSA), registered retirement savings plan (RRSP) and non-registered money. The key here is revenue streams that aren't guaranteed and tied to market performance.
It’s great that you may have had a plan for retirement, but as the world goes sideways, we all need to keep in mind your current plan is based on previous assumptions and now becomes the basis for change. Plans are not carved in stone and today's assessment is far more critical than yesterday's assumptions.
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Here is an example:
My husband Jim is a former military pilot and he used this analogy as we discussed our finances over coffee: "You need to have the discipline of a pilot when it comes to retirement planning. Before takeoff, you have your primary destination, but along the way you never know what you are going to face en route. Challenges can happen, the weather throws you a curveball midway, a mechanical malfunction, etc. The point is, before takeoff, you have to have an alternate airport to land at; in other words, a viable back up plan.”
Developing your retirement plan is great, and revising it is even better and necessary when the original assumptions are thrown into question. As I have said before, in computer science, garbage in, garbage out (GIGO) describes the concept that flawed or nonsense input data produces nonsense output or "garbage." This alone is a great risk to retirement.
The value of your investments in many cases aren't the same today, your return expectations have likely been altered, and your tolerance for taking on risk in your portfolio may have been thrown into question.
With today's Bank of Canada rate announcement and interest rates near-zero, the fear is we could find our purchasing power reduced significantly should inflation start to tick higher. This is a huge risk to retirees who still require growth in their portfolio and are forced into the markets for some upside potential, yet don't have the time horizon or risk tolerance as younger investors.
Now is the time to shift our Plan A retirement assumptions to Plan B, never losing sight that we can get still get to the destination. The route just might look a little different.
Here’s a step-by-step process we are embracing to at least secure a more accurate assumptions for our retirement calculations for now.
First, figure out these general assumptions:
1. Determine your retirement age
2. Updated the valuation of your assets
3. Base retirement after-tax income requirement in current dollars: How much will you spend each year?
4. Base life expectancy until at least age 90
5. Use a base inflation rate of two per cent
6. Determine a base rate of return (I will use four per cent to err on the side of caution)
7. Ensure tax is calculated based on the current tax law and projected income
When you are saving for retirement, the need to change course may not be as relevant; however, when you shift your focus from wealth accumulation to wealth preservation, it matters a great deal.
You can't afford not to know your numbers.