Should you delay your retirement because of COVID-19?

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Is the coronavirus-induced bear market reason to delay retirement? Some financial experts and commentators suggest Baby Boomers may be forced to set back their retirement by up to five years because of the effect lower stock prices have on retirement nest eggs. But it really depends on personal circumstances and aspirations. The good news is those with Defined Benefit (DB) pensions may not have to delay Retirement at all: “So long as the pension plan is healthy and well-funded, their retirement plan should remain intact,” says Aaron Hector, vice-president of Calgary-based Doherty & Bryant Financial Strategists. However, those counting on their own nest eggs to fund retirement “have more reason to be concerned,” Hector cautions. “Valuations have fallen and some companies will be forced to reduce or cut their dividends, which will put a damper on income sources. For them, it would come down to whether or not they had previously built up an adequate cushion to allow for this market correction.” Fee-only financial planner Robb Engen, of the Boomer & Echo blog, says, “There’s no doubt investors nearing retirement have been impacted by the COVID-19 crisis.” But long-term investors should have always been prepared for 10% to 20% drops in portfolio value any given year, which is why Engen continues to recommend a safety cushion that includes a couple years’ worth of cash, three to five years’ worth of basic living expenses in laddered GICs, and the rest in a risk-appropriate investment portfolio. Engen sees three benefits to postponing retirement: more time to earn and save; fewer years of drawing down on portfolios; and stock investments have more time to recover their value. The traditional thinking that the nearer one is to retirement, the more conservative a portfolio should be has proved to be good advice, at least in the current environment, Hector says: “The nearer you are to retirement, the less time you have to make adjustments to your financial plan, so you want to begin to build in that element of safety so plans don’t get derailed.” My own advisor says clients over 60 should be no more than 40% invested in equities. If you’re in the Retirement Risk Zone, the old rule of thumb that fixed income should equal your age is not out of line. By that rule, I should be two thirds in fixed income and only a third in stocks. But that’s too cautious, argues Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management Inc. He says stocks should equal 110 minus your age, so a 40-year old would be 70% stocks. His reasoning is that it takes a lot more resources to generate a return from cash or bonds today than 10 years ago. Figure a puny 2% return for GICs, and $1 million generates only $20,000 a year. If your income goal is $100,000 a year, you’d need a whopping $5 million in GICs, which is more than most will have. New retirees need to come to grips with the fact they may live an additional 30-plus years, that they’ll have little capacity to save once they stop working, must hedge against inflation, and may not be prepared for the escalating costs of health care or retirement homes in their final years. Getting too conservative by cutting back on equity exposure too early is often “a critical mistake,” he says. So we’re back to TINA: “There Is No Alternative” to stocks, at least for the growth part of a portfolio. But the pandemic laid bare the risk of putting too much into stocks. TriDelta Financial vice-president and wealth advisor Matthew Ardrey was recently featured in a newspaper profile on a couple in their 50s who were 85% in Canadian stocks and 15% in preferred shares. Their portfolio (near $3 million) was down 33.5% with the recent market decline. That hurts, even if the market has since regained half its losses. Ardrey suggests those with jobs should hold on to them while the crisis is in progress. “No one knows how long this will last and remaining employed is a great way to preserve your capital,” he says. If you keep adding to savings, this “will only help as markets eventually recover over the longer term.” There’s nothing like a precipitous market crash to reveal our true risk tolerance. After an 11-year bull market run, many investors lost the sense of what their actual risk tolerance is, Ardrey says, so “they may have had an asset mix with a much higher equity weighting than would otherwise be advisable.” Losing a third of your money means you will probably have to delay retirement, Ardrey says. But, if you’ve properly diversified, overall losses may not be catastrophic: perhaps 10% or 15%. “There is no magic bullet in retirement planning. If a portfolio has lost value, it can only be made up through additional savings, higher returns and time.” If spending less in retirement is not an option, “then more time is likely part of the equation, unfortunately.” In a recent blog, Toronto-based advisor Steve Lowrie said rebalancing in a bear market is “scary but important.” It’s also counterintuitive, since a 50/50 stocks/bonds portfolio hit by a bear market means you would rebalance by selling some bonds and buying now-better-priced stocks. But what if you have realized you let the long bull market lull you into higher stock exposure than you are now comfortable with? Recent rallies mean it’s not too late to properly rebalance. If you can still find winning stock positions in your registered plans, they could be candidates for switches to fixed income. Taxes make non-registered accounts trickier but it may still be possible to find embedded gains from positions established long ago; these can be offset against more recent losses in comparable amounts to keep things tax-neutral. Much depends on how fast (or if) equity markets recover. For some, it will make sense to postpone retirement, and five years may be a number they can wrap their heads around. But even then, Hector suggests re-evaluating a year or two from now to determine if the timeline can be changed. Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected].

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About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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Heidi Shearman says:

May 2, 2020 at 1:15 pm

I am retiring on June 30, 2020 one way or the other, at age 61. My employer pension plan is chump change, so it forms no part of my retirement funding. But my husband has a defined benefit plan that will be reasonable but not golden when he retires next year. With our carefully invested savings, a clear view of our spending habits (detailed spending analysis over the last 10 years) no debt at all, and regular reviews of our situation by a fee only financial planner, we are ready.

To quote our advisor “you can generate more income than you use now, what are you scared of? Oh and other than our immediate two years of money in a GIC, the rest is not invested ‘low risk’ strategies. A high quality dividend portfolio is the core of our plan, and some alternate investment strategies that suit us and are producing well even with the volatility. We will apply for OAS and CPP at 65.

To me the key to being ready to retire is to understand how you spend and/or save money – keeping accurate records of your spending habits can teach you a great deal about what you will need in retirement. And getting 100% debt free before retiring is critical.

We have money saved for some eventual house repairs, some travel, some fun and will continue living a similar lifestyle as that we have been enjoying for the last 10 years, just with more free time. We are not wealthy, we live comfortably but carefully and have planned for this time for most of our adult lives.

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Dave says:

May 8, 2020 at 7:14 pm

Not sure why article talks about losing 30% of the current value of your investments. I have a balanced and diversified ETF portfolio originally 60% equity 40% fixed income prior this virus issue. When markets started to go back up (around the -25% to -30% range, I rebalanced my portfolio selling my safe fixed income ETFs and bought equities. I also shifted the makeup of the portfolio to 73% equities and 27% fixed income. As of today, end of day, I’m at -3.23% YTD.

On that basis, why would I defer my retirement. My portfolio did what it was supposed to do to buffer the downward blow and I did my part to rebalance the portfolio and take advantage of the circumstances. Nothing else.

If that’s too hard for the average person to do, own an all in one ETF like XBAL or XGRO. They are currently at -4.08% and -6.30%. YTD.

And then, enjoy your ”not” delayed retirement.

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SC TONY says:

May 20, 2020 at 12:27 am

Good article but you can’t always blindly follow what financial planner recommends. Having 2 yrs living expense as cash as well as 5 yrs of living expenses in measly 2% GIC is way too much of cash floating around. GIC as we all know is almost as worthless as cash itself for an investment vehicle. Keeping total of 7 yrs of living expense in cash could be anywhere from $200K to $300K. I’d call it pretty dumb having that much cash seating around, not invested. This pandemic won’t last like 7 yrs, that’s far fetched over exaggeration. I’d guess within 2 to 3 months, we’ll be able to get back on our feet again. As most people say keeping 1 or at most 2 yrs of living expenses in cash would suffice as safety net when things go south. The rest must be invested. Cash is not a king. Some highly successful investors even suggested to invest with everything you got until you go broke.

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Linda says:

July 19, 2020 at 11:09 am

It took a while to understand the points mentioned in the article. Good stuff. I really appreciate the hardwork behind this article. Thanks & Keep up the good work!

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