Retirement planning never mentioned this: A pandemic grips the world, markets drop, the economy heads for a downturn and thousands face unemployment. Rather than planning retirement cruises in the next few years, many couples are now spending an uncomfortable amount of time wondering if it’s safe to get groceries and whether their retirement dreams may be gone forever.
Jason Uppal, a High Net Worth Planner with TD Wealth, says the solution to a successful retirement is the same as it has always been: plan, plan and plan some more.
While some people may be concerned they can no longer retire the way they intended, Uppal says financial plans in their most basic terms come down to money coming in and money going out: inputs and outputs. When you add or subtract money coming in or out, it impacts the whole plan. So, while the environment has certainly changed, people who were planning on retiring in the next few years may have to take a deep breath, return to their financial plan and look at basic questions: How much can they afford to live on, how much will be coming in, how much do they want to spend and how much do they want to leave to their heirs?
Answering those questions and adjusting a retirement strategy accordingly takes the uncertainty out of the planning process, says Uppal. And if someone doesn’t have a financial plan, now may be the time to get one. He offers nine things people should keep in mind right now if they were planning to retire in a few years.
1. Think deeply about your decisions
Uppal says people making knee-jerk decisions about their portfolios or financial plans without examining the ramifications of those decisions can potentially make things a whole lot worse. For instance, he says if people sell an established company’s stock that has lost its value, they may be solidifying the loss and giving up hope the stock will ever rebound. While no one has a crystal ball, history suggests that markets do recover eventually from even the deepest setbacks. Anxious retirees think putting retirement funds into cash may temporarily take away the fear an investment will drop further. But Uppal says when the markets do take off, a cash account will lose out. Moreover, inflation will over time eat away at any cash-only investments.
“Many investors cash out at times like these and try and time the market and jump back in. You could potentially lose both ways, selling at a loss and buying at a market top,” Uppal says.
He also notes that if anyone liquidates a portfolio into cash and is without a dividend element in a portfolio, cash reserves may continue to shrink over time.
Moreover, he warns people not to get jittery and sell the property in Florida or make other wholesale changes without careful consideration: you could be selling in a buyers’ market without examining whether you really do need to raise cash at this time.
2. But you can re-examine your portfolio
Uppal emphasizes that people who are nearing the end of their working life should increasingly turn a portion of their portfolio into income investments: Stable income investments can go a long way to offset expenses in retirement. How large a portion of your portfolio should be in income securities depends on many other aspects such as how much growth you need in your portfolio and what your risk tolerance is. Again, those elements should be part of your overall plan.
While you shouldn’t panic, now can be a good time to re-evaluate if the investment aspect of your financial plan is still suitable. He says there may be a few investments that will have a difficult time recovering from the new economic environment and now may be the time to make a change.
3. Can you work longer?
As mentioned, having a plan means you can alter some of the major inputs to see how it affects the overall outcome. One major input? How long you continue to contribute to retirement savings and how long you avoid dipping into those savings. The decision to work a few more years could make a big difference in your financial plan. However, retiring is about a lot more than not working: You may also have aspirational goals you want to achieve or you may have health issues you need to address. Consider if working a few years longer than you anticipated – perhaps even part-time – is an option and how much it’ll impact your life. If you love your job, it might have a positive impact on your retirement plan.
4. Can you adjust your lifestyle?
One of the other inputs you can adjust is how much money you spend. In this case, you can adjust how much you are spending now and how much you intend to spend during your retirement years. Depending on your situation, saving money may be as extreme as downsizing your home earlier than planned or may be as simple as cutting down on restaurant dining. Typically, people in their first years of retirement spend as much as they did when they were working, because they are active and travel more than they did previously. Expenses may go down as people become less active but they can also rise sharply if enhanced healthcare is needed.
5. Can you contribute more?
It may be counter-intuitive to think about contributing more to a retirement fund if your immediate future seems cloudy. But Uppal says that if you are shy of age 65, contributing more may have a positive impact over the next 20 years. These extra contributions can be made in a Registered Retirement Savings Plan (RRSP), which will lower your taxable income, or in a Tax-Free Savings Account (TFSA), where the funds can grow without tax consequences.
6. Can you minimize your debt?
Heading into retirement with large debts has always been considered bad policy, but in an uncertain atmosphere, it can be especially important to help ensure that nothing is dragging down your retirement plan. Debts you may want to avoid could include high-interest credit card debt or large items like mortgages or vehicle loans. Uppal says people should work toward getting these debts down to a minimum while you are still working and try not to incur new ones. You might consider consolidating any high-interest debt into a more manageable, low-interest debt if you have a home equity line of credit (HELOC). If you are stuck paying a large mortgage, perhaps a smaller property might be better suited to your means. And if you think you may have debts that are unmanageable, meet with a financial advisor to discuss how to manage those issues.
7. Consider your other sources of income
Uppal says people often have to be reminded of other sources of income in times when their retirement savings has experienced a setback. If you have been contributing to a pension, your outlook may be brighter going into retirement depending on how much you have contributed over the years and how healthy the pension is.
On the other hand, if you have been laid off, your pension or RRSP contributions may be lower this year. Take inventory of what you may receive from other sources of income: Canada Pension Plan (CPP) and Old Age Security (OAS), pensions or Locked-In Retirement Accounts (LIRAs) from previous employers, and also your spouse’s income and retirement plan. Don’t forget to consider Employment Insurance payments and any relief the government is now offering if you have been laid off. Talking to a financial planner can help strategize how to use and maximize these different sources of income.
8. Consider your obligations
If you feel that you are retiring at the worst possible time, remember that there may be others in the family who may also be in poor shape. You may or may not have planned to offer financial help to loved ones, but consider that their situation may have changed in the past few months too and they may be looking to you for help. While helping out family members is a personal decision, don’t adjust your financial plan without first considering their situation. You may have to help pay someone’s tuition or lend a hand temporarily while a family member gets their financial house in order.
9. Do the little (but smart) things
While you may feel overwhelmed by a large retirement plan that could last 20 years or more, remember that there are many small elements that contribute to its overall health. These include being careful with your money but also getting organized around paying taxes on time, for example, and remembering to claim all the credits you think you are entitled to. Uppal says that you may think paying an accountant $200 to do your taxes might seem unnecessary but it can make sense if your accountant can save you $1,000. The same thinking goes for managing your finances: A planner or advisor may help you deal with an OAS clawback, for example, even if you have to pay for their services.