Something scarier than recent stock market declines? Just how worried some retirees have become about their investments.
So far in the trade war, the net level of damage done to stocks has been modest by the standards of past bear markets. Yet the level of retiree anxiety apparent in interactions with Globe readers is eye-opening. A common theme: I worry I won’t live long enough to see a market rebound – should I sell my stocks?
Staying invested through market downturns is standard advice, but is it always right? This question was presented recently to Daryl Diamond, a veteran financial planner and author of Your Retirement Income Blueprint: A Six-Step Plan to Design and Build a Secure Retirement. “Speaking from our experience with people who stuck to their plan, it was never the wrong decision to stay invested,” he said.
Mr. Diamond’s theory on why retirees are so anxious is that they, and all of us, are experiencing a layering of worries dating back to the 2018 stock market decline. Next came the pandemic, 8-per-cent inflation, rising interest rates and, more recently, the trade war. “It’s been one compounding problem after another,” he said.
Retirees own stocks for superior long-term growth compared to safe investments such as guaranteed investment certificates or cash in savings. This growth helps make their money last longer, even with periodic stock market declines.
There is no making money in stocks without market declines. The best way to prepare is to have a financial planning professional build you a retirement plan for a fee – or do your own. I’ll report on made-in-Canada DIY planning options in an upcoming column.
Retirement plans help address the question of how your retirement spending needs will be met by your savings, government benefits and pension, if applicable. These plans also address what-if questions – like, what if stocks fall hard?
This year’s stock market decline was triggered by the trade war, but it should not have come as a surprise. Both the Canadian and U.S. markets had back-to-back years of double-digit returns in 2023 and 2024, which is an unusual level of success. A pullback was coming at some point – it just happens to be the trade war that started it.
Mr. Diamond’s answer to the risk of falling stocks is to build portfolios that churn out retirement income. Falling share prices shouldn’t affect the flow of dividends or the flow of interest from bonds or guaranteed investment certificates. But let’s say they do. Or that you may need to sell some investments from time to time in order to supplement your income.
For those situations, Mr. Diamond has clients keep a chunk of their retirement portfolios in cash, which can be used as a substitute for selling hard-hit stocks or funds. “How much cash depends on the times and the feelings of the client,” he said. “It might be six months or it might be 18 months. It might be 2½ years.”
Having a cash wedge in your retirement investment pie is an answer to the problem of having to make a mandatory annual withdrawal from a registered retirement income fund (RRIF). Draw down on the cash, not on your hard-hit stock market investments.
Note: You can also make an in-kind withdrawal from a RRIF, which means moving a security to a non-registered account without selling it. I have something coming up on how DIY investors can do an in-kind RRIF withdrawal. Taxes do apply, as with all RRIF withdrawals.
Mr. Diamond said Forbes has reported that bear markets on the S&P 500 since 1957 have lasted 10 months on average. “This doesn’t mean that the accounts are even in 10 months,” he cautioned. “It just means the bear market is over. So we’ve got a little bit of a wait after that.”
Some retirees worry that past experience tells us nothing about how long a trade war might last – and how much damage it could cause to Canada and the global economy. If you’re tempted to sell as a result of this uncertainty, Mr. Diamond has a couple of tough questions: Exactly where will your money go after you sell your stocks or funds, and what return will you get?
Being too conservative presents the risk that you don’t generate enough growth and deplete your savings, he said.
The stock market may be hard to live with, but it’s also hard to live without.
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