Should You Postpone Retirement?

Should You Postpone Retirement?

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:

  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 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.

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% 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.

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  1. Joe Serventi on August 11, 2022 at 2:20 pm

    Sounds to me like you are scare mongering. Probably not a good idea to use the Income Trusts as a model for acquiring retirement income for those thinking about retiring. When was the last time one of the major Canadian Banks cut their dividends??
    Just invest in Blue-Chip companies and collect the dividends and distributions. Remember Canadian dividends attract the dividend tax credit as well. Sounds to me like a win win!!

    • Robb Engen on August 11, 2022 at 5:34 pm

      Hi Joe, if the last few years have taught us anything it’s that the world is surprising. Canadian stocks can underperform over many years. Even a hard-to-imagine scenario of our government opening up the banking and telecom space to foreign entrants to increase competition is not that far fetched.

      Royalty trusts looked too good to be true. Until they weren’t. The point being, diversify your portfolio and stress test your financial plan so that short term volatility or a change in regulations doesn’t derail your plan.

      If retirement lasts 30+ years you’ll likely go through several bear markets and a few surprises along the way.

    • Bob Wen on September 22, 2022 at 9:32 am

      A potential threat today is changes in tax legislation, such as, on dividends, capital gains, a lowering of the OAS tax recovery limit, removal of income splitting on pension income prior to age 65 (like in Quebec), and so much more – I think we’re gonna need a bigger cash boat!

  2. Gene on August 11, 2022 at 3:59 pm

    I always enjoy your blogs and the many different perspectives on investment management, family finances, and retirement. I was “asked” to leave work last year and after some careful analysis with my wife and our financial advisors we decided I was able to “retire” at the age of 50. But soon, I was called on by several organizations to advise them. I’m now working about 15 hours a week, spending time with my family, exercising a lot, and thoroughly enjoying life.
    My investment style is different than your single market ETF and, even with the recent market decline, my income monthly income from investments is up.

    • Robb Engen on August 11, 2022 at 5:36 pm

      Appreciate the kind words, Gene, and thanks for sharing your story. That sounds like an ideal balance, especially for someone retiring from full-time work at 50.

  3. Bob Wen on September 22, 2022 at 9:20 am

    As a recent retiree, I’m very glad that we built a three-year cash buffer. The last thing we wanted to do was curtail our retirement plans in any way because of some temporary (hopefully) dip in the markets.

    Time is precious, more so as we get closer to the end of the conveyor belt of life, and we don’t want to waste it treading water waiting for a market recovery.

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