Fend off risks that stand between you and a comfortable retirement
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Fend off risks that stand between you and a comfortable retirement
We often picture retirement as a peaceful time when we slow down and smell the roses. That’s why retirement ads often show images of relaxed seniors walking hand-in-hand through sunny gardens.
There are some risks – such as inflation, market volatility and longevity – that can threaten our golden years. Fortunately, we can fend off these unwelcome risks by staying vigilant and taking steps to protect our portfolios.
Inflation, defined as the rise over time of the average price of goods and services, erodes the value of incomes and savings. People on fixed incomes, such as retirees, are especially vulnerable. For example, in an inflationary environment, your income needs to grow at the same rate as inflation in order to maintain your purchasing power. If your investments earn a lower rate of return than inflation, you could be forced to reduce your spending. That’s the danger of selecting only secure low-interest paying investments that don’t keep up with the cost of living.
Market volatility has earned a menacing reputation due the recent global economic downturn that caused stock markets to fall sharply, reducing the value of equities and mutual funds. While markets are now recovering from the dramatic lows of 2008, those nail-biting days reminded us that markets do fall unexpectedly, causing a negative impact on our portfolios.
Market volatility isn’t an overwhelming problem if you have many working years until you retire, since you have time to save and recoup any investment losses. It does pose a serious threat if you’re nearing retirement. When market volatility lunges out of the shadows, you may not have time to rebuild your portfolio before you begin drawing regular income from your savings.
Also, market volatility doesn’t just attack those who hold higher-risk equity investments. We’ve seen how interest rates paid on bonds or guaranteed investment certificates can also drop, affecting the stream of income that conservative investors can expect when they must renew their investments.
There are two considerations that we need to take into account when discussing longevity – while it’s good news that life expectancy is rising in our society (we live longer and we can enjoy longer, healthier lives), it also means that we must ensure that we don’t outlive our personal savings.
With the average life expectancy in North America being around 78 – and studies showing that at least one member of a retired couple may live to age 90 or beyond – it’s clear that we have to spread our retirement savings over two to three decades. Otherwise, we won’t have adequate income when we are most physically and mentally vulnerable, can’t return to work or are unable to revise our investment strategy. Adding to the challenge, it’s impossible to predict exactly how long we will live or know what issues we may face, such as hospitalization or long-term care. That makes it harder to calculate how much savings we require.
Strategies to fight off each risk
While we’ve painted a stark picture, there are basic steps you can take to restore peace and security to your retirement promenade.
- Recognize the risks, make a plan
First, develop a retirement savings plan that charts out your personal and financial goals. By doing so, you can identify and address many of the issues that can cause risk and worry. This plan will help you accumulate enough savings for retirement, and also assist in making wise decisions about issues you may face down the road, such as inflation or market volatility, and variables such as personal longevity.
This planning process should walk you through the various risks described above. For example, it will help you answer questions like: How much investment risk do you need to achieve retirement security? Is this level of risk prudent? And, how much risk can you tolerate?
While these may seem like complex topics, don’t worry, since there are many resources to help you develop a risk-reducing plan. For example, Sun Life Financial plan members can use the Investment risk profiler to determine their investment risk tolerance and the online Retirement planner can help you create a solid financial plan. For added peace-of-mind, some individuals may want to consult with a qualified financial advisor to help develop a tailored plan and complementary investment portfolio, to validate their current plan or to resolve any lingering doubts.
- Diversify to defend against the risks
As you’ve heard before, diversification is a proven method to offset the risks of saving for retirement. Simply put, diversification spreads your risk over different types of investments so you balance both the overall risk and your potential returns. By doing so, you also help protect your savings from the market ups and downs, since different types of investments like stocks and bonds usually move in different directions.
There are two basic ways to diversify your retirement portfolio: diversify by asset class and within each investment type. To diversify by asset class you should ensure your portfolio has a mix of different types of investments such as cash, bonds and stocks.
Next, you should diversify within each investment type. For example, if you are purchasing equity mutual funds, you should try to diversify them by geographic region, management style and sector (the industry in which they invest). This also applies to cash investments. For example, if you purchase guaranteed investments, you should diversify them by maturity date so that they are not all due for renewal at the same time. By holding a mix of one to five year maturity dates, you can take advantage of different interest rates.
- Revisit your retirement plan
Although financial experts tell investors to be patient and stick with their retirement plan, you shouldn’t be complacent about monitoring your progress either. You should revisit your plan at least once a year to compare it to your investment goals to ensure they align. You may discover that your financial goals have shifted or that changes in the financial markets or the economy require you to adjust your holdings. This is a good time to confirm that your portfolio is in good shape to handle market volatility, inflation and longevity issues.
- Scan the horizon and adjust your route
After reviewing your retirement plan and comparing it to your actual investment portfolio, you may find that it’s time to rebalance to make sure they still align with your goals or the realities of the markets. For example, you may discover that your risk tolerance has changed and you want to increase/decrease the percentage of equity investments you hold.
You’ll also find that rebalancing is necessary as your portfolio grows. For instance, your investment plan may indicate that you should possess 40 per cent equities and 60 per cent fixed income investments. However, as stock markets rise, the equities in your plan may grow above the 40 per cent threshold, meaning that you should shift some of those funds to fixed income products in order to restore balance.
Rebalancing becomes extremely important as you near your retirement date. For example, in order to avoid the risk of market volatility, you’ll likely wish to shift your asset mix towards more conservative investments – and shift your focus from asset growth to asset preservation – since you’ll soon begin withdrawing them as retirement income.
Enjoy life without fear
With a bit of common sense, caution and prudent steps, you can enjoy that garden walk without hesitation, ready to take in all the sights, sounds and fragrant blooms that retirement can provide.
Simply call Sun Life Financial’s Customer Solutions Centre at 1-866-224-3906, Option 1, any business day from 8 a.m. to 8 p.m. ET., or consult with your financial advisor to discuss your retirement plan, and determine which options suit your needs to realize your vision of retirement for you.
If you have a general question or suggestion about this newsletter, please send an e-mail to email@example.com or write to my money At a Glance Newsletter, Group Retirement Services Marketing, Sun Life Financial, 225 King Street West, Toronto, ON M5V 3C5.
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