When stock markets drop, even just for a couple of days, it is a powerful reminder of just how important the ups and downs affect your retirement income.
It also shows how valuable the Canada Pension Plan, a workplace defined benefit pension or even annuities are to generate reliable, steady, consistent and predictable retirement income that you cannot outlive.
If you are retired or getting close to retiring, then you’ll want to pause to think about the impact of volatility on your income in retirement.
The tricky part of planning your retirement income is that it will never coincide with the stock market. When the stock market drops 3 per cent today and it just happens to be the same day when you sell some investments to create your monthly income, the stock market doesn’t care.
When you decide to make a large purchase like a vacation or a car or renovations on your home and withdraw the money today when the stock market drops 3 per cent, the stock market doesn’t care.
You’ll often here that stock markets will bounce back (many times true) but for you, today, you have possibly $5,000, $10,000, $20,000 or more fewer dollars invested in stocks that you hope will go up.
When you are looking at retirement income you want to last for 25 or 30 years, too many days like today where your life and the stock markets are not in sync, will cause shortfalls in the future.
So, when stock markets have a short term drop it is an important reminder that stock markets go up and down and this volatility can have a major impact on your retirement.
So, what can you do? Have a look at your investment portfolio and make sure you are diversified, meaning that your investments are spread out among different countries, types of companies, and have a mix stock and bonds. Reassess whether you can handle large ups and downs in your investments, because if not, when things really go down you’ll likely panic (it’s natural) and withdraw your money when it is a really bad time. Panicking will be the biggest possible detriment to your retirement income.
Secondly, make sure you have some short-term savings. Keep that money in a high interest savings account as you want to access that money first in any emergency or to live off. Yes, you may earn less over a period of time on this money, but it will help reduce the likelihood you’ll have to suddenly pull out money from your investments that occurs at the same time as a down stock market.
Lastly, pensionize some of your retirement income. Everyone has access to the Canada Pension Plan. For most people, they have contributed most of their lives and have built up a significant pension that will consistently pay a monthly income for a lifetime. It is something unaffected by how the stock market performs. The Canada Pension Plan is also indexed to inflation, meaning it will keep its value in real dollars as you grow older.
Since the Canada Pension Plan is such an important piece to your retirement income puzzle, look at how you can wait until at least age 65 to start that benefit. In 2017, 39.3 per cent of Canadians starting their Canada Pension Plan benefit were age 60. In one of their most valuable investments they took a 36 per cent penalty that they will pay for year after year for the rest of their lives. Considering that a 60-year-old couple, living in Canada, has a 25 per cent chance that one of them will live until age 98, for most of that 39.3 per cent it may not have been the best thing to do for their overall retirement.
If you aren’t sure whether delaying your Canada Pension Plan benefit is a smart decision for you, I recommend you take the CPP Quiz I created. A few minutes taking the quiz could help you maximize one of your most valuable retirement income sources.
So, when markets have a couple dips over a few days there is no need to panic, but it is a reminder that volatility exists and that there many strategies for reducing its effect on the income you receive in retirement.
Ignoring this friendly reminder from stock markets puts your retirement at risk.