By Julie Cazzin with Allan Norman
Q: I’m set to retire later this year and my portfolio is down 30 per cent. What should I be doing? I don’t know if I have enough money to retire anymore. — Cynthia
FP Answers: Cynthia, welcome to a bear market. I imagine things were going along just fine for you and then you were suddenly caught out. Now the question is: what to do?
Most of what you read in today’s newspapers and magazines says something such as, “Hold tight, things will recover, you’ll be OK.” I’m not sure that’s an honest answer.
Sure, if you’re accumulating money and have a broadly diversified portfolio, things will recover, but if you have a one-stock portfolio, which I have seen, or are in a very specialized sector of the market, who knows.
We also don’t know how long it will take for markets to recover. In 2020, markets dropped about 30 per cent after COVID-19 hit and recovered almost right away. Conversely, the average rate of return for the S&P 500 from 2000 to 2010 was minus 0.9 per cent before fees.
How quickly do you think a retirement portfolio will recover if you’re making withdrawals and the average 10-year return is going to be minus 0.9 per cent? The sad truth is, it’s likely not going to recover.
Ideally, you want to prepare your withdrawal portfolio before a bear market, and because we never know when a bear will appear, always be prepared. This means having a well-diversified withdrawal portfolio, with the expectation that at any point in time, something in your portfolio will be up in value — or neutral at a minimum — and it is from these funds that you will make withdrawals.
Traditionally, this has meant a mix of cash, annuities, guaranteed income certificates (GICs), bonds, equities and rental properties. More recently, private credit and equity have become available to most investors, but they are still not widely available. The investment mix will depend on your income and growth needs as well as your comfort level. This is something you should explore once markets recover.
Until then, the best course of action with an all-equity withdrawal portfolio may be to reduce or stop withdrawals and employ the three Cs of financial planning: Create, Convert, Conserve.
Can you create money by working longer or turning a hobby into a business? Can you convert something into money by selling an asset such as a second car, downsizing your home or using a line of credit or reverse mortgage? Can you conserve money by spending less?
If you need to take monthly withdrawals for income and need some assurance, consider selling enough of your portfolio and keeping the cash to provide you with an income for three months or a full year. This way, you are hedging a small portion of your portfolio against further market drops.
Also remember that if you had an all-equity portfolio heading into a bear market, it may have been larger than it would have been if it had contained some cash and bonds.
Although minimizing investment withdrawals during a market downturn is likely the safest thing to do, it doesn’t mean you shouldn’t re-evaluate your investment portfolio.
If you have non-registered investments you’ve wanted to sell and haven’t because of capital gains tax, this might be the ideal time to sell. Or, if you like your non-registered investments, consider transferring them in kind to your tax-free savings account (TFSA) if you have contribution room.
Do you have a balanced portfolio of 60-per-cent equities and 40-per-cent bonds? Think about what might happen if equity returns recover faster than bond returns. Constant rebalancing back to a 60/40 split may mean selling equities and buying bonds as equities recover.
My view is that if your risk tolerance allows, let the equities run when the recovery comes and then ask yourself if you need 40 per cent of your portfolio in bonds. Perhaps you would be comfortable substituting some bonds for private credit or some other fixed-income type of investment.
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One other thing you might consider, as this is your last year working, is making your registered retirement savings plan contribution now, when you know markets are down, rather than at the end of the year.
There are some risky things you can do such as borrowing to invest while markets are down or buying leveraged exchange-traded funds, but these things aren’t suitable for someone about to retire and unsure if they have enough money.
Cynthia, you have the portfolio you have, and the market is down about 20 per cent. It’s not the best situation, but it should be manageable. The more you can leave in your withdrawal portfolio, the better the chance for recovery when markets recover, which they will, eventually.
Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. He is also registered as an investment advisor with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or firstname.lastname@example.org.
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This commentary is provided as a general source of information and is not intended to be personalized investment advice
Read More: FP Answers: My portfolio is down 30%. Will I have enough to retire?