Many years ago, 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 crashed earlier this year and we’re (still) faced with high inflation and the possibility of a recession.
Related: Your Retirement Readiness Checklist
Stocks and bonds just endured one of the worst six month periods in history from January 1 to June 30, 2022. The S&P 500 was down 20.47%, while Canadian stocks were down 9.86% and Canadian aggregate bonds were down 12.33%. Stocks and bonds have shown a modest recovery since then (as of this writing) but a balanced portfolio is still down about 10% year-to-date (Aug 11th, 2022).
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 10-20%. That’s okay, right? As long as those dividends keep rolling in. Just remember that while dividend cuts are rare, they do happen from time-to-time.
There’s no doubt investors nearing retirement have been impacted by stocks and bonds falling in 2022. 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, and the remainder of your retirement funds in a risk appropriate investment portfolio (preferably low cost ETFs). Conservative investors with sufficient resources may also opt to hold another 3-5 years worth of spending in GICs.
But that’s not helpful to you today if your portfolio is down and you don’t have a cash cushion to fall back on. That’s like telling someone who just got laid off 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:
- You’ll have more time to earn income and save for retirement
- You’ll have fewer years of retirement withdrawals, thus extending the life of your portfolio
- 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 2-4 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 – or can be used for your “fun money” like spending on extra travel and hobbies.
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.
Related: The Retirement Risk Zone
Long-term investors know that a portfolio falling 10-20% 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, high inflation, or an economic recession. Their plan is relatively bullet-proof.
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% 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 crashes 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.