Retirement planning for the risk-averse
Past market volatility has left some investors gun-shy about taking risks. But the biggest risk now is outliving your financial plan.
By: VIRGINIA GALT
The financial downturn of 2008 and the market volatility in its aftermath had a significant effect on investor confidence in Canada.
But while some investors were left feeling gun-shy about taking risks in their investments, the biggest risk now is more about age than the markets, says Kari Holdsworth, vice-president, individual wealth at Sun Life Financial in Waterloo, Ont.
“As the Canadian population is aging and more Canadians are approaching retirement, what has been a focus on saving for retirement now needs to transition to, ‘Okay, what does my financial life look like in retirement?’” she says.
According to Statistics Canada, one quarter of 65-year-old couples will have at least one spouse who is alive at 94, “which is far more than people appreciate,” says Ms. Holdsworth. For half of all couples entering retirement, at least one of the spouses will live until 90.
“The risks that people face in retirement are different than the risks they faced prior to that,” she says. “The number one risk now is outliving the term of their financial plan.”
The 2014 Sun Life Unretirement Index, a survey conducted by Ipsos Reid that tracks Canadians’ attitudes and expectations about retirement, found that investor sentiment has improved somewhat among working Canadians saving for retirement. For example, 44 per cent of working Canadians surveyed said they were satisfied with their retirement savings, up from 33 per cent in 2012. As well, 64 per cent of respondents believe they will have enough money to enjoy the lifestyle they want, versus 59 per cent a year ago.
“The effects of the [2008-2009] financial crisis on Canadians’ retirement expectations appear to be wearing off,” reads the Unretirement report. “On the whole, though, [investors] remain unsure about their ability to achieve their financial goals.” When asked if they think there is a serious risk they could outlive their retirement savings, over one-third of respondents (36 per cent) said yes.
Ms. Holdsworth says the improved confidence about financial security in retirement is driven largely by the fact that markets have seen some recovery. But there is also a group for whom “the experience of the economy of the last few years and a realization about some of the risks they will face in retirement has led them to become less confident than they have been before,” she says.
This uncertainty can be a catalyst for investors to rethink their plan and make sure they have that lifetime guaranteed income, says Ms. Holdsworth. “In the past, guaranteed lifetime income was often provided by defined benefit pension plans, but those don’t exist today the way they did in the past, so new retirees today are in a position of having to provide for themselves.”
Financial advisors can play an important role in helping working Canadians understand how the retirement landscape has changed, and that the onus is on the individual to an extent current retirees did not experience, says Ms. Holdsworth.
“With some customers, that build-your-own-pension-plan idea resonates, and that helps them talk about what they are looking for,” she says.
Adrian Mastracci, portfolio manager and financial advisor at Vancouver-based KCM Management Inc., says that planning for three decades of dependable retirement income is “the new money management challenge, especially during times of continued low returns and large investment losses… Not only does [your money] have to last, but you have to manage it.”
The most essential element of a secure retirement is to start planning early, invest consistently and revisit the asset mix on a regular basis to buffer the effects of the inevitable market fluctuations, Mr. Mastracci says. Once retired, it is important investors not withdraw too much, too quickly. “If you squander it, you are squandering your retirement,” he says.
Yet relatively few Canadians have projected how much they will need for how long, what their investment strategy should be, whether their portfolio is diversified enough that they won’t be ruined by a downturn or how they will pay for medical costs down the road, says Mr. Mastracci.
“I liken it to building a home without a blueprint.”
To help investors cope with challenging investment environments, Sun Life’s website provides a primer on how to invest in a volatile market: Be patient and don’t panic (markets can eventually recapture losses, reaching and surpassing former levels, presenting opportunities for long-term investors); Diversify (a diversified portfolio, with a variety of investments, can carry less risk, as it is unlikely that the entire portfolio will decrease in value); For the risk-averse, look for financial instruments, such as segregated fund products, that guarantee a certain level of income regardless of market performance (“This is particularly true in retirement,” reads the website, “where market fluctuations have a bigger impact because assets are being withdrawn at the same time.”)
Ms. Holdsworth notes that in response to growing consumer concerns about outliving retirement savings, Sun Life has launched a new suite of segregated fund products, some of which provide a guaranteed lifetime income while allowing investors to participate in the markets. With this type of product, investors can grow their asset base when markets rise, but still have income protection when markets fall. Because of the income guarantee, these products cost more than traditional mutual fund offerings.
A financial advisor can outline the benefits versus the costs of various investment instruments available on the market so the client can make an informed decision about which retirement plan best meets his or her budget, needs and appetite for risk, Ms. Holdsworth says.
“Our philosophy is that a plan should be tailored to the individual, what protection they want to put in place and what risks they are still willing to accept,” she says. “Every individual has different goals, different needs, different income and different preferences about which things they are comfortable with and which things they really want some peace of mind about.”
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