Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published by the Private Client Team at KJ Harrison Investors
As we progress into the second year of living with COVID-19, with many countries facing additional lockdown measures, there is hope that the end is in sight. Around 80% of the Canadian population is fully vaccinated, and over 25% has received their booster dose, with that number climbing weekly. Canada’s economic prospects are picking up. Perhaps we can start thinking about the legacy of COVID-19: what we have learned from it, and how it has changed us.
There could be lasting effects on public health policies, on workplace practices, on the way (and where) we travel and perhaps even on how we socialize. It might also have a deep impact on the way we think about retirement. After all, older Canadians have been among the demographic groups most affected, not only in terms of health (the risk of death from COVID last year was more than 30 times higher among Canadians over age 65) but also in terms of their finances and lifestyles. For many, the future might look much different now than it did only a year ago. If so, then it makes sense for those in or approaching retirement to carefully consider their retirement goals and make sure their retirement plans are right for them.
Here are seven considerations that we think are particularly relevant to retirement planning in the post-COVID world:
1. Risk tolerance
It might seem like the distant past now, but just under two years ago the equity market plunged by almost 40%. Though it has recovered since then, the spring 2020 meltdown provides a stark reminder that a realistic assessment of risk tolerance is critical for those in or approaching retirement. In retirement, wealth preservation becomes a crucial consideration, and a stock market downturn on the scale of 2020’s could be devastating to a portfolio that has to last for decades. Unlike folks in income-earning years, the runway is short for
retirees, and they don’t have as much time to recover. Investors should assess their portfolio’s asset allocation and make adjustments based on risk tolerance as needed. A trusted financial advisor can help investors reallocate and rebalance portfolios to reflect the degree of risk they can handle – just in case the worst happens again.
2. Fixed income
Bond yields have been rising recently, with the 10-year Treasury yield hitting a pandemic era high of over 1.8% in January 2022, a level that we have not seen in two years. By historical standards though, they are still very low. For retirees who expected to fund their lifestyles through interest earned on traditional fixed income, that could present a significant challenge. For investors in or near retirement, one important question is how well a traditional 60/40 asset allocation of equities and bonds meets their retirement needs, and whether it is time to consider alternative income strategies.
We are currently seeing levels of inflation in the economy that we have not seen in decades. Inflation is always a key concern for retirees because of the loss of purchasing power. This is true when inflation is trending around 2% and is magnified when that number increases to the levels we are seeing today (closer to 4% or 5%). Further, seniors are more likely to spend money on things that tend to increase in price, such as healthcare, housing, and travel. To limit the effect of inflation on their retirement, retirees can add investments that are likely to increase in value as inflation rises and ensure that their portfolios are properly diversified across a variety of asset classes. It is essential to evaluate the effect of inflation when planning for a comfortable retirement.
4. Time horizon
Some people focus so much on how much they want to save for retirement that they underestimate the importance of the other half of the equation: how much they will spend in retirement. The rate at which someone draws down their retirement nest egg obviously has a determining impact on how long it will last.
That is why a realistic time horizon is so crucial to effective retirement planning, and the COVID-19 environment and its risks make that task both more important and more complex. For instance, a recent retiree probably did not withdraw much from their savings last year, but their lifestyle during COVID is likely to be far different from their lifestyle after it. One year of relative restraint is probably not a reliable benchmark upon which to plan a 30-year retirement.
5. House and home
The pandemic exposed some vulnerabilities in Canada’s infrastructure for senior care. Several long-term care facilities became hot spots for COVID, and many residents found themselves subject to prolonged periods of isolation from their family and friends. The challenges to the long-term care system might well be addressed by policymakers in future, but in the meantime, many retirees with the means to do so may explore alternatives. For some who formerly might have planned to sell their home at age 85 and move into a long-term care facility, for example, staying in their current home or downsizing might now seem a more desirable alternative. That change will require new retirement planning, since they will now need to plan for the cost of in-home care services, transportation and other expenses. Ageing at home is already something of a trend in Canada, and COVID might well accelerate it.
6. Retire, semi-retire – or keep working?
If there are any positives coming out of the COVID environment, one of them is that individuals and organizations have become more comfortable with working from home and other flexible work arrangements. Many professionals and business owners enjoy that flexibility – they work when and where they want, there is less hassle commuting, and so on. For many, that, along with an awareness of the physical and mental benefits of continuing to be engaged in work, could translate into a desire to work beyond 60 or 65 or whatever retirement age they had previously planned around. If working longer is something under consideration, it is worthwhile to assess the impact on a retirement plan and make adjustments. Even four or five more years of work can make a huge difference in terms of saving and expected spending in retirement.
For all its terrible costs, the pandemic at least has created an opportunity for ageing Canadians to recognize the importance of talking about when and how they will spend the last years of their lives. If they have not already done so, people nearing retirement should consider putting together an estate plan, reassessing their will so that it accurately reflects their legacy wishes, and developing an end-of-life plan. And if they have not yet worked with their financial advisor to create a robust, post-COVID retirement strategy, now would be a good time to start.