What does this financial crisis mean to your retirement?

“The Black Swan”

September 29 will likely be one of “those days” that we will long remember as we look back on the performance of investment markets. We endured the previous “Black Monday” of October 19, 1987 when most Canadian boomers were in the early stages of putting our money aside for the future. While the 1987 market crash pared almost 25% off the value of the U.S. market and 11% in Canada, the fact that many Canadians had their retirement savings locked away in their RRSPs made the crash more of a news event than a threat to their long-term plans. The event is, for most of us, a distant memory of something that few thought could happen.
Today, we are facing the same kind of shock to the global financial system. The difference now is that our perspective has changed and we no longer look at meltdowns in our financial markets with detachment.
Also, our investment time horizon has changed. We are no longer talking about a loss to our long-term money—it is our short-term plans that are taking a hit. The question is, how will this affect your plans and how should you look at your retirement nest egg in light of recent events?
A lesson learned from 1987
The 1987 market crash was much more than a deep reversal in stock fortunes. It represented a watershed moment that has been called a “black swan” event because many thought that it couldn’t happen. Our ideas about rational market behaviour and efficient markets were called into question in the aftermath of that Monday, though time has muted the lessons somewhat.
September 29, 2008 may in time be considered another of those “black swan” events, but this time with a major difference. Many North American investors now feel that their entire retirement plans are in peril and will no doubt examine their future plans with less optimism than before.
Black swan events can happen at any time. They show us that the world doesn’t always unfold in the way that we think it should. If our retirement plans are dependent on a “best case scenario” or a perpetually rosy outlook on “the way that things are supposed to work” then it may be time to take a new look at the assumptions we have made about the future.
If your retirement is within sight, what does all this mean to you?
First, this isn’t the end of the world as you know it. At some point, cooler heads will prevail and we will all be older and wiser. There are some positives that most Canadians should take from all of this that will remind them of how important financial prudence is as they approach retirement.
The lesson learned here is that life has its ups-and-downs and you have to plan accordingly. Warren Buffet had a great piece of investment advice for retirees when he said that,
“Because investing is such an inexact science, it is always better to be approximately right than precisely wrong!”
The people who will likely suffer the most through all of this are those who have lived close to the edge, leveraged themselves far more than was wise given their circumstances and depended on a perfect scenario unfolding that will give them the retirement of their dreams.
This is a reality check on your personal finances on the verge of your retirement.
As you look at how your retirement investments have fared, it might be a good time to rethink some of the bets that you have made.
Behavioral finance suggests that the older we get, the more conservative we become. Unfortunately, many Canadians looking at retirement have not taken the prudent approach to their retirement nest egg and have taken unnecessary risks to try to maximize the amount they can retire on.
Obviously diversification is the key, but not just by stock market sector. Asset allocation is particularly important as you move into retirement because you want to ensure that you have protected yourself as much as possible.
Don’t forget too that in times of market stress, there will always be opportunities that present themselves. If you feel that you have invested in good quality companies, then down markets give you the chance to buy more at lower prices.
Here are the steps you should take now:
1. Sit down with your investment advisor and review where you stand. Don’t panic—this probably isn’t the time to sell everything and run for the hills! If you own good quality investments, they will need some time to recover. Consider dollar-cost averaging or making new investments on companies you feel are sound.
2. Review your debt situation and get your financial house in order if it needs it. The credit crisis has been caused in part by an overuse of credit on a grand scale—there will be household meltdowns on a much smaller scale if individuals are over-leveraged and the world doesn’t unfold like they planned.
3. Reexamine your retirement plans and take a close look at the key areas of your life that will require some thought. This isn’t just about your money, but also your family issues, your health challenges, your leisure, your relationships and your home. You are no doubt getting a sense of how important “financial comfort” is in the light of today’s news and you may want to look at the kinds of things that will give you financial comfort in the future.
4. Don’t panic, just stay informed.
If you are already retired
I like the idea of thinking about your retirement savings in terms of the three spending buckets that you will have in this next stage of your life. As you reexamine where you stand in light of market turmoil, divide your retirement savings into three categories and invest accordingly.
1. Your “essentials” bucket—this is the money that you will have to spend on food, clothing, shelter, transportation, insurance and everything else that is absolutely essential to live your retirement life. This money should not be leveraged to the stock market and should be kept safe and secure; if the market melts down again you want to feel comfortable that your basic life needs are covered. Guaranteed monthly withdrawal plans and your company pension if you have one are good ways to make sure this is covered.
2. Your “lifestyle” bucket—this will pay for those things in retirement that will provide you with life enjoyment. Your investments here will likely be more growth oriented, though you still want to protect some of it so that your ideal retirement lifestyle isn’t going to be wiped out in a market crash.
3. Your “nest egg” bucket—this is your savings account or long-term retirement money. At the end of your life it will form the major part of your estate but in the short run it will likely be the source of your financial comfort. You want some growth here, but also diversification because this is longer-term money and you want to preserve as much of it as you can while still receiving a return. Real estate, precious metals etc. are good ways to diversify your nest egg bucket.
However, your nest egg bucket will also have to provide you with emergency funds if you need it so make sure that there is at least three to six months of living expenses that you could immediately draw on if you needed it. World equity markets aren’t the only things that have black swan events!
Rethinking early retirement
There will be people who have had to change their retirement plans overnight based on current events. While markets will likely rebound and some form of normalcy return, the fact that this event could even happen will give pause to some.
I have found that a lot of people have planned for an early retirement without the financial foundation to be able to weather a storm. We should all remember that this will not likely be the last of such storms and that a retirement plan has to consider both the good things that could happen as well as the things that might go wrong.
If you are thinking that you want to retire early and depend on your pension, your investments or your savings to sustain you, consider what kind of protection you have against the unexpected.
Would there be any scenario that might force you to go back to work to sustain your lifestyle in retirement? Do you really have enough put aside to walk away and be free from any kind of financial worry?
I have seen far too many be so keen on early retirement that their assumptions about the performance that they will get on their investments and the income that they will need are just not realistic.
My question for you is whether the whole idea of “retirement” is what you want anyway? If the market crisis has caused you to even wonder whether you can afford to retire than perhaps you are getting your own answer simply because you have had to think about it.

Retiring on your own?
Taking control of your retirement plans
When we conduct retirement seminars, most of our audience are married couples. In fact, much of the planning programs and articles picture a traditional couple enjoying their retirement activities and sailing off into the sunset together. It would be easy to just do a presentation that would apply to the majority of the audience and hope that the singles in the group would simply take out the information that would apply to them and ignore the rest.
At the end of one of my sessions, I was approached by Margaret and Janice. Both women were in their fifties; Margaret had been widowed several years ago while her friend Janice had been divorced for the past five years. “What advice do you have for those of us who are going into retirement on our own?” Janice asked me. “What are some of the challenges that we will face that couples won’t have to deal with?”
The transition into retirement can be a trying time for most people whether they are in a relationship or on their own. Many retirement plans assume that couples will engage in new activities or enjoy exciting travel and that together they can build a future after work. Yet, Statistics Canada tells us that 30% of Canadian boomers are single and 60% of all Canadian women over age 65 are single, widowed or divorced.
There are few tips or information available for singles facing retirement without a partner. The few that I have come across in my own research concentrate on how singles can avoid “the loneliness of retirement” as if being single and retiring was a double dose of bad luck!
In fact, I know a lot of couples entering retirement very much on their own. They don’t share the same views on what they are going to do, they may be dealing with competing goals or perhaps one partner is suffering an identity crisis.
To assume that all singles encounter problems in retirement and that all couples are happy is an overgeneralization. I see a number of issues that all retirees will have to face that will apply equally to both groups.
However, there is one area where many singles are at a disadvantage as they enter retirement: their financial situation may not be as healthy as a couple with two savings plans, two company pensions etc. Also, no life insurance policies to provide an extra cushion in later life.
I recognize that it is tough for two people to live as cheaply as one, though I find many singles in retirement spending more on travel, entertainment and hobbies as a way to enjoy their time or develop new relationships or interests.
I think that many couples in retirement can actually learn something from successful singles who are doing very well in their transition. Here are some of the keys to a successful retirement for singles:
1. Keep working. Many singles opt to stay in the workplace for as long as possible. Additional income, pension benefits and other employee benefits are just some of the financial reasons. This is not only a good thing to consider financially, but from a retirement lifestyle perspective it also makes good sense. Workplace relationships are very important in providing a social network that can be sustained into retirement. Longevity studies also suggest that the longer you work at something you enjoy, the more positive the effects on your longevity. Too often I see people give up their work at the behest of a spouse or partner and end up being miserable. When you are single, you are making your own decisions!
2. Develop a robust social network. When you are single, you are more likely to develop and sustain friendships than if you are married. In retirement, a nurturing and supportive social network is a key to success and most single retirees are aware of the need to develop “surrogate families” or close personal friendships that will provide many of the same comforts as a married relationship. By the way, if you are so inclined be open to new relationships! You never know when you will meet someone special who might want to share your retirement with you. For some singles, this is very important—others are quite comfortable living life on their own and not wanting to enter into a relationship. The nice thing about singles retirement is that it is entirely your choice.
3. Be a “self starter”. In retirement, self-directed people tend to do better than “other-directed” people. The ability to take control of your life, make decisions and plans on your own because you have to, and look to your inner strength to manoeuvre through life’s challenges and opportunities are important keys to retirement success. The New England Centenarian study shed some light on the importance of taking control in later years. In that study published in 2007, researchers found that an abnormally high number of women who lived past the age of one-hundred had never been married! This isn’t an indictment on marriage, but a testimony to the fact that if you make it to one-hundred and you have never been married, you had to be a self-starter for a lot of years!
4. Be a life-long learner and explorer. Since this is your own retirement and you don’t necessarily have to share it unless you want to, you can use some of your time to expand your mind. Is there a course that you always wanted to take? This is your chance to go back to school and learn about something that has always interested you. How about a trip that you have long dreamt of? The nice thing about travel for singles is that there are so many possibilities that are designed specifically for someone on their own who would like the support of a group but the freedom of independence. A friend of mine recently returned from a women’s only trekking adventure to Everest base camp. Most cruise lines have single-friendly cruises also. You can combine travel with socialization and you don’t have to feel uneasy or out-of-place.
5. Remember the principles of healthy aging. We already know that women generally live longer than men and that overall health of women retirees is higher than their male counterparts. While both need to pay attention to their health, it is also important for singles of both sexes to remember that healthy aging is as much a mental issue as it is a physical challenge. Retirement success is a lot about attitude. If you are happy with your situation as a single retired person, or have learned to deal with it you will enjoy a more successful retirement. If not, stress and depression can undo your best efforts to live a healthy physical life.
Finally, a large number of Canadian singles in retirement didn’t start out that way. Whether they have lost their spouse through divorce or bereavement, the fact is that many new singles had other retirement plans that they were going to share.
I am convinced that all couples should conduct a ‘fire drill’ when they make their retirement plans. That involves a frank “what if?” discussion that would address the possibility of the “best laid plans’ going astray. Suddenly single is tough enough on both your physical and mental health that it is worth at least considering what you might do if you found yourself in that situation.
At the very least, satisfy yourself that if you had to take over the family finances tomorrow, you could do so with little stress.