What if the Stock Market Crashes right before you Retire?

Many investors have been a little shook up over the last couple weeks as we have seen more volatile markets than we have seen in years. The extended period of lower volatility has made people forget that corrections (like what we seem to be going through right now) are part of normal market movement and are to be expected. This however, does nothing to comfort many of you who experience it, especially those who have either just retired or are looking to in late 2019 or early 2020. So, what is the best protection against the stress?

Diversification of Assets

On the investment front the solution is simply diversification of your assets. One of my mentors has a line for this which I like to use, 'concentration to get rich, diversification to stay rich'. Most investors who are working and building their assets have a reasonable amount of their investments allocated towards stocks (companies). The reason for this is that stocks tend to have higher average growth rates than other asset classes. So holding more of them would have helped you to grow your assets to more sizable levels.

These investors were also more comfortable stomaching the volatility that the stock market can have as they were not reliant on their portfolio for income. They were also likely adding to their investments through regular contributions from their employment income. As these individuals get closer to retirement (especially if they are going to depend on their portfolio for income, they should look to diversify some of that volatility away by increasing their exposure to a broader range of asset classes).

I would recommend that you not wait until you retire to start doing so as you may experience a market correction just prior to your retirement and that could force you to wait until your portfolio recovers before retiring. As a general rule I would suggest that you start diversifying at least 3 years prior to your retirement date and allocate money into asset classes which include real estate, bonds, infrastructure, commodities*, cash and stocks. Your family index rate, the rate of return needed to achieve your financial goals, should guide how much money is invested into each asset class while also considering your comfort level for volatility.

Income Protection Strategies

Additionally, you should consider using income protection strategies such as a cash wedge strategy to preserve your portfolio from you drawing income from assets that have declined in value. This is a portfolio killer. Investment strategies for retirement can be the easy part of this whole process. If you have done what you need to do to build your assets and prepare financially for retirement, then implementing new investment strategies and shifting focus to capital preservation is 'relatively easy'.

The hard part for many is the mental shift that they are going to face. Many investors struggle with the mental shift associated to the strategic deconstruction of their life savings. Consider the fact that you have spent your entire life building up this asset pool and now you are shifting gears to taking money out. Even if your investment have positive returns, if your need for income is higher than the return you are achieving (similar to how pension plans operate) then you will see declining asset levels on your portfolio statements.

This can be a difficult pill to swallow. There are many investors and advisors who plan for the financial side of retiring but fail to consider the emotional stress which can be experienced. As advisors it is important that we have conversations with our clients as they lead up to retirement and ensure that they understand what they are about to go through. As investors it is important that you take the time to consider the fact that perhaps for the first time in your life your net worth may start to decline.

This is especially important for those of you who gain comfort by seeing large sums of money in your bank account, or who take comfort in their monetary safety net. For those of you in this camp, retirement can be a very stressful time. It is also important to ensure that you are putting things into perspective. Money is a tool to accomplish your goals and it should be used. I have had this chat with many of my clients this year and reminded them that there are no Brinks trucks behind hearses. You have worked hard for your money and you should make sure that you enjoy it.

Ensuring Capital Preservation

We cannot control what markets do and over a short-term period they are completely unpredictable. If you are within three years of retirement you may wish to consider (if you haven't already) making a few changes to your portfolio to ensure your capital preservation is adequate. What is potentially more important than that is that you take the time to mentally prepare for what you are going to experience as well both in terms of lifestyle and what you will see from your investment portfolio going forward. Don't let this stress get in the way of you experiencing your best life.

- Grant White, CIM, CFP

Grant White is an award-winning Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.