Should You Postpone Retirement?

My boss (Jerry) was all set to retire at age 58 when the federal government decided to impose a tax on the distributions of income trusts and royalty trusts. He was heavily invested in the energy sector – in oil royalty trusts with a history of generous payouts thanks to years of special tax treatment. Share prices of the trusts dropped immediately following the announcement, and distributions were slashed as income trusts converted to conventional corporations. 

Jerry decided to postpone retirement – to keep working and give his investments time to recover (though many never did). He worked two more years before leaving the hotel. I ran into him several months later at Home Depot, where he had picked up a couple of shifts a week to keep himself busy. Part of me wondered if he still needed the income to help fund his retirement.

Many soon-to-be retirees may be wondering if they should postpone retirement after markets plunged due to the COVID-19 global pandemic and we face the possibility of a prolonged recession.

Back on March 23rd the TSX was down 34 percent for the year while the S&P 500 had also fallen more than 30 percent. What a difference two weeks can make. Markets have recovered significantly as of this writing (April 7th). The TSX is now down just 18 percent for the year while the S&P 500 is down just 15 percent. 

Don’t get me wrong. These are still serious market drops. If you had planned to retire this year, or even in the next three years, your portfolio has been dealt a significant body blow. Is it enough to alter your retirement plans?

When to Postpone Retirement

My former boss Jerry had his entire retirement portfolio invested in income trusts and dividend stocks. His retirement income plan was to live off of those distributions. That changed in a hurry during the “Halloween Massacre” when then Finance Minister Jim Flaherty announced changes to the taxation on income and royalty trusts. Share prices fell, and distributions got cut in half or were eliminated entirely. 

Are you nearing retirement, with the majority of your portfolio invested in dividend paying stocks and REITs? Are you expecting to rely on income from these investments to fund your retirement?

Let’s assume your portfolio is down 20 percent. That’s okay, right? As long as those dividends keep rolling in.

Then you get the news that Boeing suspended its dividend. Same with Ford. JPMorgan is considering suspending its dividend for the first time in history. On the Canadian side, we’ve already seen Cenovus, Crescent Point, Inter Pipeline, A&W Royalties, and Boston Pizza all suspend or slash their dividends. Historic times, indeed.

There’s no doubt investors nearing retirement have been impacted by the COVID-19 crisis. This is precisely why I advocate for a safety cushion of cash that includes one or two years worth of spending money in your bank account, 3-5 years worth of spending in GICs, and the remainder of your retirement funds in a risk appropriate investment portfolio (preferably low cost ETFs).

But that’s not helpful to you today. That’s like telling someone who just got laid off due to COVID-19 that he or she should have had an emergency fund. Thanks, Captain Obvious.

While not a desirable solution, postponing retirement does offer a trifecta of benefits for soon-to-be retirees whose portfolios have been decimated by the recent market crash:

  1. You’ll have more time to earn income and save for retirement
  2. You’ll have fewer years of retirement withdrawals, thus extending the life of your portfolio
  3. Your investments have more time to recover, which also gives you time to build your safety cushion of cash and GICs

Perhaps a more desirable solution is to work part-time like Jerry did at Home Depot. Many retirees have found joy working at a golf course, garden centre, driving shuttle, or pursuing an entrepreneurial activity. Others ease into semi-retirement with their current employer, opting for 3-4 days a week or taking on a consulting role.

The point is, earnings from part-time employment can supplement your income in retirement so you rely less on investment withdrawals – especially during a market decline.

Just Retire Already

Other soon-to-be retirees might be fretting over nothing. These are the investors who already have a safety cushion of cash, perhaps accompanied by a nice workplace pension. They’re invested in a risk appropriate portfolio that is still built with an eye to the long-term. Besides, as a balanced portfolio, it’s only down 9 percent for the year. Annoying, yes. Devastating, no.

Long-term investors know that a portfolio falling 10 or 20 percent is entirely within the range of expected outcomes in a given year. That’s why they’ve built a margin of safety with enough cash and pension income to rely on for 1-5 years and give their portfolio time to recover.

Their retirement plan is conservative enough to provide income to age 95, with assets left over (including their home) in their estate.

Their cost of living is low enough to afford them flexibility in their retirement spending – with the ability to increase spending in good times and reduce spending in bad times.

These near-retirees would likely be able to retire and meet their spending needs, even amid a global pandemic and economic recession. Their plan is relatively bullet-proof.

Final Thoughts

A market crash can be a scary time to retire. Real dollars are at stake, and it can be emotionally painful to see your portfolio fall 20 percent or more in such a short time. Seemingly sound plans can get thrown out the window in the blink of an eye.

If you’re feeling nervous about retiring soon then perhaps you need to re-examine your retirement plan. Perhaps a decade of stock market gains had clouded your judgement and made you overconfident. 

Postponing retirement, even by six months to a year, can be a great way to shore up your finances and put safety measures in place so that the next time the market crashed it doesn’t take your retirement plans down with it.

Looking for a retirement reality check? Talk to me about my fee-only financial planning service.

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14 Comments

  1. AD on April 7, 2020 at 1:20 pm

    Hi Robb. Great article! I’m one of the really lucky ones who listened to you last year and took steps to change my portfolio and that of my husband. We were almost entirely in dividend bearing investments, but nearing retirement age, so even though they were still paying hefty dividends we took your advice and sold off half and converted to 18 month GIC’s paying 3%. This is our 5 year emergency cash fund, leaving the other half for longer term investments. Bit by bit we were converting those stocks into ETF’s to have more of a couch potato portfolio going into retirement. We were about half way there when COVID happened so of course we still have losses there, but with a cash cushion to live off in the early years of our retirement, hopefully we’ll get back on track when things get a bit more stable.
    Thank You so much for writing this blog. I have learned so much from it and find it an easy to understand way of thinking about your finances. I always forward to my adult children hoping they’ll take your advice too.

    • Robb Engen on April 7, 2020 at 4:07 pm

      Thanks so much for the kind words. Sounds like the prudent steps you’ve taken to de-risk your portfolio leading up to early retirement have paid off. It’s also nice to hear of this idea paying off in practice. Thanks for sharing!

  2. Hazel on April 7, 2020 at 1:29 pm

    One major retirement concern I have is the effect of the pandemic on the CPP.
    Up until now we’ve been assured that our CPP will be there for us, even if we delay taking it until age 70. In fact, my financial plan is built on this premise – the promise of a larger CPP payment if I wait.
    But now, with so many unemployed and not contributing to CPP, will it still be there? While our CPP investments will recover, over time, like our personal investments, what will the effect be of this major unanticipated reduction in contributions from the Canadian workforce? I’m sure that projections up until a month ago were built on normal contribution trends. Could you explore this in another retirement article? Thanks for all the great articles so far!

    • Robb Engen on April 7, 2020 at 4:08 pm

      Hi Hazel, thanks for this comment. I’m not sure that a couple of months of no contributions will have a dramatic effect on one of the largest pension plans in the world, but who knows? It’s a good question and one that I will explore for a future post.

      • Hazel on April 7, 2020 at 5:25 pm

        If it’s only a couple of months I won’t worry. But if not…
        Thanks for considering for a future post. I guess we’ll wait for the dust to settle.

  3. Brian on April 7, 2020 at 1:52 pm

    I still remember the Halloween massacre. I was younger so I was more heavily into equities and these income trusts than I should have been. It was my single largest daily drop in my portfolio ever. I learned valuable lessons from that. My portfolio did recover but it took time and a different approach.

    • Robb Engen on April 7, 2020 at 4:09 pm

      Hi Brian, scary times, indeed! Glad you were able to come out of that crash with lessons learned and a new outlook.

  4. Gail Bebee on April 7, 2020 at 2:59 pm

    Part time work in retirement depends on two things -availability of a suitable job, and good enough health that you can work. Thus, I don’t think money from a post-retirement job should be needed to cover essential expenses. It should be considered for non-essential things like travel.

    • Robb Engen on April 7, 2020 at 4:11 pm

      Hi Gail, you’re absolutely right and I should have mentioned that in the article. There’s a certain privilege to be able to work in retirement and that shouldn’t be taken lightly. I like the idea of part-time work funding travel and other hobbies (golf, for example).

  5. Dumb Wealth on April 7, 2020 at 11:13 pm

    I see retirement as an escape from living by someone else’s rules. It could happen at age 20 or age 70. With that said, I don’t think people should retire and vegetate on the couch. People with experience need to share their wisdom. Write a book, teach, share. People want to know.

  6. Pam Fines on April 9, 2020 at 7:58 am

    I have a ways (about 20 years) to retirement but I have been starting to shift my portfolio over the last 3 years or so to get more balanced from high risk. In 2008 I had net -30% returns one year but have also had +20 returns a few years. As I reached 40 I decided a bit less volatility would be sensible.

    All told my portfolio is only (ONLY) down about 12% this year so I think I have been moving in a better direction. Good years are maybe less (+12%) than previously but the reduced volatility has been helping my stomach lining.

    I am thinking I’ll be pushing a bit more into a laddered GIC just to add a bit more safety into my net now that my RRSPs and TFSA are maxed. Nothing like a pandemic to make me think about increasing the safe portion of my portfolio without digging a hole in the backyard.

  7. Gin on April 11, 2020 at 3:23 pm

    I am curious as to whether we have seen the end of the market downturn at this time. There seems to be a feeling of ‘the market went down significantly, has recovered quite a bit and now we can look forward’.
    Many jobs have been lost, hopefully temporary but there will be permanent job losses as well. Some small businesses will not survive and large businesses will be weighed down by debt.
    It doesn’t feel to me that the economic damage has been priced into today’s marked yet at 18 % down YTD.
    If there wasn’t a sufficient safety cushion to take a further (perhaps large) dip, it would seem prudent to wait until at least the end of this year to see how the market evolves.

    • Robb Engen on April 11, 2020 at 4:17 pm

      Hi Gin, the truth is no one knows where markets are headed and whether or not they’ve priced in the full extent of the economic damage caused by the pandemic. That’s why it’s best to have an investment plan you can stick with in good times and bad.

      The bottom line: your investment strategy shouldn’t change due to market conditions.

    • Gin on April 11, 2020 at 5:46 pm

      Prior to making the decision to retire.

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