When our retirement date is decades away, time is our friend. During a market downturn, while we may not enjoy seeing the value of our investments drop, we know that prices will recover and even increase, by the time we retire.
However, once we're retired, our time horizon — the length of time before our invested money is needed as income — shrinks. We don't have the luxury of waiting five or ten years for a major downturn to reverse course.
“Cash flow is priority number one in retirement," says Joe Snyder, Product Analyst at Tangerine Investments. "We've worked all our lives to enjoy the fruits of our labour. This is typically not a time when we're looking for a lot of growth from our investments. It's more about managing and maintaining what we already have," he says.
But what happens if you need cash just at the time the market has one of its episodic meltdowns?
Let's say you need to withdraw $3,000 a month from your investment account to maintain your retirement lifestyle. In the first month you cash in 100 units of a mutual fund that has a current value of $30 per unit ($30 X 100 = $3,000).
Next month you do the same thing, only in the meantime, the value of the units has gone down. Now it's $25 per unit. To get the same $3,000 you've got to cash in more units. Your pool of units is dropping faster than planned. You can see how relying on rapidly changing assets to pay your fixed costs is a recipe for sleepless nights.
"Asset allocation is key to ensure you don't have to sell assets whose values are rapidly changing," says Snyder. Basically this means that you take some risk out of your investments by putting some in fixed income like GICs or bonds, some in cash, and some in equities.
"One rule-of-thumb is to have, as a minimum, the same percentage of fixed-income assets as your age," Snyder says. "For example, if you're 60, then 60% of your investments should be in fixed income and cash and the remainder in equities."
"During retirement we should have somewhere between one and two years of expenses in more liquid investments, like bond funds, that are easy to access and less likely to decrease in value," says Snyder. "Your basic living expenses are covered and you're not forced to sell into a down market."
Another way to protect your savings is to be more disciplined about spending. Susan Stefura, a certified financial planner and co-founder of Bespoke Financial Consultants Inc., suggests setting up a systematic withdrawal plan from your bank. These allow you to mimic the timing of previous salary payments. "If you know you need an extra $24,000 per year to cover expenses, you can opt to receive monthly transfers of $2,000, instead of one lump sum that might tempt you to spend more."
And if the idea of parking a chunk of your savings makes you uncomfortable, you're not alone. “I find the hardest thing for my retired clients is sitting on their money," says Stefura. “They are dismantling a lifetime of savings."
A high-level view of retirement planning with the decisions and actions to be considered. Download our guide: Preparing for and Entering Retirement.
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