While the pandemic has destabilized a lot of the stock markets around the world, retirees who draw on their savings and investments are worried.
Before retirement, it is in a accumulation phase. This means that time plays in your favor, and the volatility also.
“At that time, it has been a long-term perspective, and therefore a drop in the markets will not have an impact on your retirement income. But when we leave the active life and that we are beginning to collect in his assets to make ends meet, his and supplement government annuities, the situation is reversed completely, ” warns Jean-Philippe Vézina, financial planner and tax specialist for the team of Jean-Maurice Vézina.
In other words, the time plays against you as you tap into your investments, and your capital gradually reduces.
In a full meltdown of the stock market, your capital may melt like snow in the sun, as is currently the case. How to react ?
Strategy in a bear market
Martine, age 65 and recently retired. She withdrew 1800 $ per month to his RRSP, as of 1 January 2020, had a balance of $ 300,000. According to their investor profile, it will be able to get 5 % return on its investments, even if the portfolio knows of the changes.
But the stock market turbulence have changed the game.
“Given that Martine is withdrawing money every month, a decline of the markets has a significant impact on the retirement. If she does nothing, she will have exhausted her RRSP at the age of 82 years “, said Jean-Philippe Vézina.
He said that one should not withdraw from the market in periods of significant decline. It is recommended instead to adopt different strategies.
“For example, it would be better to set up a second portfolio comprising investments much more cautious with a value equivalent to about two or three years the cost of the life of Martine, and take the samples in the following when the market is bearish “, he says.
By applying this method, Martine will be able to avoid absorbing losses, and shall extend the duration of his or her RRSP up to approximately 88 years. It should be noted that financial planners usually make projections for their clients up to the age of 95 years.
A portfolio management adapted
In addition, when the market will rise again, Martine will be able to use the benefits achieved in its first RRSP to rebuild the second, in which she makes the withdrawals.
It should also ensure that the manager of his portfolio, be proactive in the current circumstances, for example in selecting individual securities strategic.
“It is always a case-by-case, but one could think of the products defensive, that is to say securities which are relatively secure, which affect the consumption of base, power supply, etc,” says Jean-Philippe Vézina.
In this way, Martine will keep investment and will be able to take advantage of the rebound in the markets which will eventually occur, as demonstrated in the story.
“We have never seen a recession will extend over three years,” said the tax accountant.
- What is the worst gesture that could pose Martine in the current circumstances ? Sell everything and liquidate its portfolios, said Jean-Philippe Vézina. If she did, she might miss the train of the market’s recovery when it materializes. In times of a bear market, it is therefore essential to have a global vision and long-term.
- If you are already in retirement, ask your financial planner to put in place a disbursement strategy tailored to your situation. A personalized plan will help to sustain your savings over a long time.
- You can’t sleep at night ? It is a sign that you should promptly review your investor profile to choose a more prudent, for example.