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Navigate New Risks and Ongoing Change

Wants and needs change as you move through phases of “retirement”.

Economic and financial conditions change.

Significantly, sources of risk change when you are approaching and in decumulation of retirement compared to the risks when accumulating. The retirement red zone is a period of heightened risk related to longevity, or the risk of running out of money before running out of life. In a nutshell, a prolonged downturn or period of simply mediocre returns in the years just prior to or after retirement will greatly reduce the number of years investments will last. This is known as sequence of returns risk, and is something to plan for if investments need to provide a significant portion of your retirement income.

With all of this change, it’s important work with someone you can trust that is specialized and dedicated to helping you navigate this terrain.

(Image Source : Michael Kitces at Nerd's Eye View)

The Portfolio Size Effect And Optimal Equity Glidepaths (kitces.com)

The blue line in the graph above represents an investment portfolio expected to last for life (to age 95) under a set of assumptions. The risk is that if returns are poorer than expected in the retirement red zone, the portfolio may be depleted many years prior to life expectancy, or spending would need to be significantly curtailed.

This second graph shows a relatively recent example of the impact of sequence of returns risk. The time around the bursting of the tech bubble in early 2000 turned out to be one of the worst times financially to retire in the last century. The ten years following the crash became known as a lost decade of stock market returns, with values in the US S&P 500 index not getting back to previous highs until early 2010, and values in the Canadian TSX index not until mid-2009.

The late 1960s and the time around the 1929 stock market crash were also bad timing to begin retirement.

As of 2024, markets have generally been good for 15 years since 2009 following the global financial crisis, with relatively short corrections including early in the Covid-19 pandemic.

There are a number of ways to reduce sequence of returns risk.

If using traditional investments only, you can …

Spend conservatively at a level that’s expected to be sustainable for your lifetime (safe withdrawal rate)

Maintain spending flexibility based on market performance using guardrails to determine when to decrease or increase spending (flexible spending)

Spend only from safe assets by separating your money into buckets to cover short-, medium- and long-term needs, with low, medium and higher growth/risk investments, respectively (bucketing).

Reduce portfolio volatility by adjusting your asset allocation either dynamically or using a rising equity glidepath.

With annuities or other safer income strategies, you can …

Have a safety-first approach by covering non-discretionary or all expenses.

Moshe Milevsky, Professor of Finance at the Schulich School of Business at York University, world-renowned expert on retirement finance, and best-selling author of several books on retirement income including, “Pensionize Your Nest Egg”, has said the goal financially should be to get yourself on autopilot so you don’t need to make high-impact decisions at more advanced ages when your cognitive abilities may have declined.

Other prominent academic retirement researchers agree that safer income sources are the most efficient for providing retirement income, at least to cover your non-discretionary expenses. Safe income sources also give you a confidence or “license” to spend and to be more aggressive with your other investments.

With home equity or other reserves, you can …

Have buffer assets augment your income as needed or desired using home equity or other buffers.

We can determine the best approach or combination for you based on your preferences.