I quit my full-time job in December 2019, three months before a global pandemic shut down the world. I watched my investments fall by 34% in the sharpest and most rapid market decline in history. I cancelled two European vacations.

While I did get a three-month head start on the whole work-from-home thing, my routine was quickly disrupted when schools shut down and my kids were sent home for online “learning”.

I dreamt of building my blog, writing, and financial planning business while travelling and working from anywhere with an internet connection. Life comes at you fast.

Instead of panicking and thinking I made a huge mistake, I stepped back and checked in on my plan. I still had a popular blog with a strong readership of people who respected my opinion. I had a secure freelance writing gig with no shortage of financial topics to write about. And I had a growing financial planning practice with an eager waitlist of clients.

Stuck at home, I doubled down on my business – writing more articles, taking on a reasonable number of clients, and finishing up the work to earn my financial planning designation. 

As we know, stock markets went on to recover their early 2020 losses and then some. My investments returned between 9 – 12% that year, depending on the account type. The LIRA I set up in April 2020 went on to return 22.5% thanks to the fortuitous timing of that lump sum contribution.

Business boomed that year and again in 2021 thanks to the work that my wife and I put in laying the foundation in early 2020.  

Fast forward to 2022 and markets are reeling again (although nowhere near as bad as March 2020). I’m still invested in Vanguard’s All Equity ETF (VEQT) across all accounts. I’m adding new money every month to our corporate investing account, picking up more units of VEQT at a discount. The way I see it, these new contributions have a higher expected return (over the long term) than they did 6-12 months ago.

Related: Exactly How I Invest My Own Money

Business is still strong, but I’ve lost a freelance writing client that made up a good chunk of income. I’m using that gift of time to work on a project that I believe can replace the missing income and fill a void in the market for want-to-be DIY investors, so stay tuned for that.

Meanwhile, I have clients at different ages and stages wondering how all of this *waves hands at everything* is going to impact their financial plan.

Should we change long-term inflation projections to 6% annually? Should we stay working for another year or more until all of this settles down? Should we sell our sensible investment portfolio and park the money in cash?

When I meet with clients I encourage them to zoom out and take a bigger picture view of their financial plan and future goals.

Are they still in their accumulation years? Are they still making regular contributions to meet their savings and investment goals?

Is their job secure? Have they negotiated a salary increase commensurate with the current inflation environment and tight labour market?

Have they looked at their own personal inflation calculator to see how their own spending stacks up against the CPI (our spending has trailed CPI by 0.6 – 2.5% over the past 12 months). Have they built in a spending buffer for the year to account for higher inflation and any unplanned minor expenses? 

Clients who are retired or getting close to retirement age may be more concerned about high inflation and poor investment returns. I remind them to focus on what they can control.

Perhaps a large one-time purchase gets delayed, for example. In most cases, we’ve built a buffer into their retirement spending that can be used for extra travel or hobby spending in good times, but can also help curb the rising cost of groceries and gas during higher inflation periods like this, or cover an unplanned expense.

I remind them of their safe withdrawal plan and that withdrawals can be spread out over the entire year (dollar-cost-averaging in reverse).

Related: Your Retirement Readiness Checklist

FP Canada issues guidelines every year that are designed to support financial planners when making long-term (10 or years more) financial projections.  The projection assumption guidelines look at items like expected wage growth (3.1%), borrowing rates (4.3%), inflation (2.1%), fixed income returns (2.8%), and stock returns (6.3% to 7.7% before fees).

Knowing the questions planners would be facing this year regarding inflation and stock return assumptions, FP Canada included some helpful guidance for planners to share with clients:

“It is not unusual for significant fluctuations to occur in the market over a short period of time. For example, a financial planner may be preparing a financial plan at a point in time following a marked increase in the stock market, or planning may occur following a major decline in the stock market.

Movements and fluctuations can also be seen in the release of Consumer Price Index results, such as a negative rate in May 2020 and then a rate near 5% in December 2021. In looking at a 2-year rolling average, 94% of the time the inflation rate was between 1%-3%, compared to 73% on a one year time frame. As of December 2021, CPI has averaged 2.32% over the last five years and 1.82% over the last 10 years.

Based on the current economic conditions, financial planners may be tempted to drastically change just one assumption, like increasing inflation to 4% for the entire retirement planning projection. By revising only the rate for inflation, the financial planner ignores the correlation that exists between inflation and interest rates and the cited asset classes. If inflation remains high, interest rates would typically go up, as well as the return on equities over the long-term. We recommend that financial planners use the projected economic assumptions as a whole and avoid attempting to personalize a forecast for the client by making a drastic adjustment to a single variable. Presenting alternate scenarios and projections to the client may be a better approach.”

Inflation will be tamed in time. Investment returns will increase in time. We have no idea when, or what will happen in the short-term. But we have much better information about long-term trends.

For instance, if expected global stock returns are between 6-8% per year on average over the very long term, and the previous 10-year period averaged 12.66% per year, that should tell us to expect lower returns over potentially the next decade. We should also expect a negative year from time-to-time. What we shouldn’t expect is global stocks to continue posting double-digit returns every single year.

Viewed through that lens and it’s no surprise to see that stocks are down so far this year. Does that mean you need to change your perfectly sensible portfolio of low cost ETFs? Of course not. Falling stock prices is a feature of their risk-reward trade-off, not a bug. But those who stick to their sensible strategy tend to be rewarded over the long term.

Final Thoughts

They say plans are worthless but planning is everything. Check in on your financial plan. Do the decisions you made at the time still hold up? Or should they change based on new information?

It’s normal to have second thoughts about your financial decision making when faced with high inflation, declining stock prices, a global pandemic, or an unprovoked invasion marking the biggest war in Europe since World War Two.

There’s no need to tinker with a low cost, globally diversified, and risk appropriate portfolio. It didn’t “stop working” just because prices have fallen. As Ben Felix says, your investment strategy shouldn’t change based on current market conditions.

Indeed, for those in their accumulating years, take advantage of falling stock prices and keep adding to your portfolio (just like it said to do in your financial plan).

If you’re in the retirement readiness zone, and nervous about your investments and inflation, it’s certainly reasonable to consider postponing retirement until the situation improves. Check in on your financial plan anyway, just to make sure you’re not just falling into the “one-more-year” trap.

Finally, if you’re already retired and spending down your investments then this environment can feel downright nasty. A financial check-in might be in order to see if your level of spending is sustainable, your investments appropriately allocated, and that your other assets and income streams have been optimized in your retirement plan.

Decisions can be revisited, like when to take CPP and OAS (if you haven’t already), whether you should downsize, or sell your home and rent, whether to complete that kitchen renovation or put it off for a year or two. These choices, that are within your control, can positively affect your retirement plan – more so than trying to hit a home run with your investments to make up for 2022’s losses.

If you’re ever looking for a sober second thought – an unbiased look at your financial plan and future goals – check out my fee-only advice page and give me a shout. I’d love to help.

*Sponsored by RBC Insurance*

The reason why retirement planning can be so difficult is because the one variable we need to know – how long we have to live – is impossible to predict. Sure, we have mortality tables and family history to help guide us, but statistically speaking, half the population will outlive their median life expectancy.

That makes longevity risk – the risk of running out of money before you die – a very real threat to your retirement. And yet many Canadians ignore this threat by not saving enough during their working years, retiring before they’re financially ready, taking Canada Pension Plan benefits too early, withdrawing too much from their RRSPs, and so on.

On top of that, a global pandemic and recent economic uncertainty has had a significant impact on seniors and their retirement plans. RBC Insurance conducted a survey of Canadians aged 55-75 in March 2022. The survey data showed that:

• One third (33%) of Canadians say they retired sooner than planned, or intend to change the date of their retirement because of the pandemic
• Among already retired Canadians, more than one quarter (28%) are spending more than they anticipated, while four in ten (41%) have experienced unexpected expenses
• As Canadians live longer the impact of inflation on their savings, expenses and purchasing power is the most pressing concern for the majority (78%), as well as a lack of guaranteed income (47%), outliving their savings (48%) or their spouse (38%), feelings of loneliness (36%) and not having a legacy to leave behind (25%)

Having enough money to support their desired lifestyle is a real concern, highlighted by the fact that nearly half (48%) of those surveyed are worried about outliving their retirement savings.

How Annuities Can Help In Retirement

One way to protect against longevity risk is to purchase an annuity. Annuities fell out of favour (if they ever were in favour) when interest rates plummeted over the past 10-15 years. But with interest rates on the rise, annuities are certainly worth another look.

An annuity provides a predictable income stream for life – much like how a defined benefit pension, CPP, and OAS pays benefits for as long as you live. Nothing protects you from longevity risk quite like having a guaranteed income that’s paid for life.

It’s puzzling why more Canadians don’t choose to turn even a portion of their savings into an annuity – to pensionize their nest egg, to borrow a phrase coined by financial authors Moshe Milevsky and Alexandra Macqueen.

Lack of knowledge around annuities may also be why only 7% of those surveyed are taking advantage of them.

Let’s break down some of the advantages:

• You have the option to continue your payments to your spouse or beneficiary if you pass away during a certain time period.
• Your payments are locked in the moment you purchase a Payout Annuity. You don’t have to worry about what the market does or where interest rates go. Your income is guaranteed.
• It’s possible to invest in an annuity using your RRSP and/or RRIF savings, or non-registered savings.
• When purchased with non-registered funds, the interest portion of your monthly payment is spread out evenly over the Payout Annuity’s life. This levels out your tax payments and minimizes the taxes you pay.
• You can stagger your annuity purchases to help increase payouts.

Annuity Payout Rates (How Much Will You Receive?)

Speaking of payouts, I thought it would be helpful to see some examples of just how much income to expect from an annuity based on several different scenarios:

*Calculations made at https://www.rbcinsurance.com/annuities/index.html

I’ll be honest, I perked up when I saw the payout rates were between 5 and 7 percent of the initial deposit. Now, keep in mind, those rates won’t increase with inflation each year, but it’s still a healthy (and guaranteed) amount to receive for life.

I mean, why wouldn’t a relatively healthy 70-year-old male not want to turn $250,000 into annual income of $16,856?

The break-even age on that $250,000 investment would be 85 years old (84.83 to be precise). But a 70-year-old male has a 50% chance of living until age 89. By that time, he will have collected $320,264 in annuity payments. That’s impressive, considering he is receiving 6.74% of the initial balance each year.

Remember, we’re talking about protection against longevity risk. As tragic as it would be to get hit by a bus in the year you purchased an annuity, you won’t be around to curse the decision and, if you get a 10-year guarantee period, you’ve built in some protection for your beneficiaries.

Quick Facts About Annuities

Your annuity income is determined at the time you buy the annuity and is based on several factors such as interest rates, age, and your life expectancy.

Your payments will be higher if current interest rates are high (and vice-versa).

The older you are when you buy the annuity, the higher your payments will be because you’re not expected to live as long.

Men will receive more money than women because they have a lower life expectancy.

There are many types of annuities, including:

• Single life annuity – guaranteed income for the life of one person
• Joint life annuity – guaranteed income for the lives of two people
• Term certain annuity – guaranteed income for a set period of time

You can also customize your annuity to include:

• A minimum payment guarantee if you (or you and your spouse) pass away before the end of the guarantee period (ranging from 1 to 25 years), remaining payments will be paid to your beneficiary
• A return of premium guarantee where your entire premium deposit is refunded to your beneficiary if you (or you and your spouse) pass away before you receive your first annuity payment.

Under-spending In Retirement

One last thing on the annuity puzzle. Some proponents argue that annuities not only protect against longevity risk, but also the risk of under-spending in retirement.

A U.S. study found that roughly two-thirds of retirees who have $150,000 in savings at age 65 tend to spend no more than they receive from guaranteed income sources, such as Social Security and pensions. They’re afraid to spend the lump sum because they value liquidity.

An annuity, being a guaranteed income source, would make it possible to spend a bit more freely in the early years of retirement.

Final Thoughts

Annuities can play a vital role in your retirement planning by helping to mitigate the threat of outliving your money while providing a predictable income stream for life.

I’m not suggesting you turn every penny of a million-dollar portfolio into an annuity but carving out a portion to create your own personal pension will add another valuable and guaranteed income stream that you never have to worry about managing in retirement.

RBC Payout Annuities are provided by RBC Life Insurance Company.

Buongiorno! We’ve spent two glorious weeks in Italy, arriving first in Rome before moving on to Florence and Venice. Three very different, yet equally amazing cities!

I loved the history of Rome. We toured the Colosseum, the Roman Forum, and the Vatican, ran through Circus Maximus and along the Tiber, tossed a coin into Trevi Fountain, and climbed the Spanish Steps.

Florence stole our hearts with the spectacular views from Piazzale Michelangelo and inside Boboli Gardens. Pictures cannot properly capture the experience of standing in front of the Duomo, or at the statue of David. A truly remarkable city.

We stayed in Florence over Easter, and it was insanely busy. We attempted to view the exploding Easter cart (Google it) but ended up on the wrong side of the square in a crowd. It sounded amazing, though!

Then we spent three magical days in Venice – which was a dream come true for me. We took the kids on a gondola ride across the Grande Canal (under the Rialto Bridge) and through the many small canals that flow through the city. We got lost in the many side streets (alleys). We toured Doge’s Palace, walked through the Bridge of Sighs, and climbed St. Mark’s Basilica for a breathtaking view of Piazza San Marco.

Yesterday we took a train from Venice to Arezzo and then rented a car to drive to our final destination – Cortona – to spend a week in Tuscany.

Even though we’ve been on a 32-day trip before, three weeks is still a long time to travel and we were feeling burnt out yesterday. It will be nice to relax in our quiet hilltop house for the rest of our trip.

A magical view, even in the rain last night

It has been so nice to be able to travel again and see such amazing places in Italy. We’re looking forward to a relaxing stay in Tuscany before heading back home next weekend. In the meantime, feel free to follow along on Twitter where I’ll semi-regularly update this thread:

Waited two years for this trip – taking in the sights of Rome today pic.twitter.com/0wyYNbE8Jt

— Boomer and Echo (@BoomerandEcho) April 10, 2022

What I’ve Been Reading:

I shared my thoughts about how young investors should handle their first taste of market volatility for this Toronto Star article:

“The challenge, he said, is that investors want all of the upside in a good market and none of the downside in a bad market, which can cause investors to overestimate their risk tolerance in bull markets then panic when their investments fall in value.”

A terrific video from Dimensional to give some perspective on short-term investment performance. Investors can focus on the daily rain clouds and sunshine the markets bring. Or they can think about the long term.

“You go to a sunny climate because, on the whole, you expect nice weather. But, even in a tropical paradise, it will rain from time to time. Global markets have been bumpy so far in 2022. Investing for the long term means breaking out the umbrella from time to time. It doesn’t mean that the rain will last forever.”

Andrew Hallam on why your investment results sometimes have little correlation with the intelligence of your plan.

Here’s PWL Capital’s Justin Bender explaining the math behind why passive investors MUST beat active investors:

A great article by Nick Maggiulli at Of Dollars and Data on why you’ve been thinking about inflation all wrong.

Here’s Nick Maggiulli again with an op-ed at CNBC arguing that high inflation won’t hurt stock returns in the long run.

Why a mere 2% allocation to cryptocurrencies in an otherwise diversified portfolio will account for 25% of your overall portfolio volatility.

Rob Carrick says it’s time for banks to reverse a rate grab from 2015 that punishes borrowers to this day (looking at you, TD).

A really good piece by mortgage broker David Larock on the Bank of Canada’s 0.50% rate hike:

“Variable rates are still available at discounts of more than 1% over their fixed-rate equivalents, and I continue to believe that they have the potential to save borrowers money over the next five years.”

I’ve been getting a lot of questions from readers asking if they should change their investment strategy, or lock-in their variable rate mortgage because of everything going on in the world.

For the record, I’m still invested in 100% VEQT across all accounts. I’m still in a variable rate mortgage. What was sensible three months ago or three years ago is still perfectly sensible today.

I love how Andrew Hallam connects financial freedom and happiness, and in this piece he explains why some FIRE devotees really miss the mark when it comes to their goals.

Why you might need to update the executor in your will as you get older. Makes good sense.

Finally, these cautionary tales about investing in private mortgages seem to come up all too often. Here’s one that collapsed, affecting 500 homes and $10 million in investor money.

Ciao – enjoy your weekend!