Whether an investor is preparing for retirement, already enjoying it, or in the middle of establishing a long-term retirement plan, the COVID-19 pandemic has created a lot of uncertainty and volatility in the financial markets.
Driven in part by recent vaccine optimism, equity markets have however recouped most of the losses incurred at the start of the pandemic. Meanwhile, returns on some fixed income assets and GICs, which are typically used for retirement savings, are not as attractive as they used to be, with central banks interventions putting downward pressure on interest rates. Though taking on more risk may be tempting in this environment, understanding one’s risk return profile is crucial before making any drastic changes to retirement portfolios.
While there is no one-size-fits-all approach, retirement investment portfolios should be diversified according to each individual’s risk tolerance and time horizon. Younger folks who are far away from retirement generally have more leeway to buy growth-oriented equities. The reality is, given their longer investment horizons, they have more chance to recover if the stock market undergoes corrections. Typically, as individuals get closer to retirement, they should gradually decrease their exposure to equities and move towards “safer” fixed-income assets, which should ideally provide sufficient returns to counter the long-term effects of inflation.
Combining equities and bonds in retirement portfolios by allocating them accordingly to each investor’s profile, has been fruitful over the last decade, with bond prices benefitting from the falling interest rate environment and equities reaching all-time highs. But as markets continue to evolve, adding alternative investments such as real estate, private equity and loans is also an option, as they are uncorrelated to traditional equities and fixed income, and may even provide additional income.
Facing the headwinds of a “lower for longer” interest rate environment, enhanced volatility and potentially inferior returns relative to previous years, some investors may need to readjust their retirement plan, chose to save more and even postpone their retirements.
However, before rethinking one’s retirement plan, it is important to consider the following:
Retirement is an important life stage; many are not adequately prepared for it. In order to preserve the same quality of life during retirement, about 70% of the annual individual’s pre-retirement income is suggested by many experts. Some may need more or less, depending on their future projects. Starting saving early will prevent individuals from having to work twice as hard when getting closer to retirement. By setting money aside in RRSP and/or TSFA (through pre-authorized monthly contributions rather than a large one at the end of the year/March deadline) interest accrues tax free each month, on every dollar invested, without undue pressure on budget.
1. Financial Planning Standards Council, October 30, 2018.
2. CPA Canada survey on expenses, November 2018.
3. The Canadian Payroll Association, September 2018.
4. Ipsos survey, LowestRates.ca, May 2017.
5. “The Current State of Retirement: Pre-Retiree Expectations and Retiree Realities,” Transamerica Center for Retirement Studies, December 2015.
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