How to fix a broken retirement

Summer 2009 CSANews Issue 71  |  Posted date : Jul 21, 2009.Back to list

Simple suggestions for getting the financial side of retirement back on track

To call it a downturn would be an understatement. For retirees, the past year or so has been nothing short of a disaster.

First, there was the U.S. housing market meltdown, which eroded the value of property not only in America, but around the world. Then came the credit crunch, in which banks, life insurers, credit card companies and other financial services companies faced an unprecedented crisis of confidence. Then, the general stock market took a turn for the worse, pushing most stock portfolios squarely into the red. To top it all off, there's been a continued period of low interest rates, which has suppressed returns from bonds and cash.

Suffice it to say, the financial position of most retirees is in need of some serious repair. So what can you do about it? We suggest a two-pronged approach:
  1. reconsider some of the broader financial decisions that might impact your financial position in retirement; and
  2. review your retirement portfolio in order to fix any problems and position it for long-term success.
While every individual's financial situation is unique, here are a few common-sense tips that can help both retirees and the soon-to-be-retired fix their finances without sacrificing their peace of mind.

Keep the fear in perspective

First things first – retirement is a long-term life change. And while short-term events such as the current financial turmoil can certainly influence your retirement decisions, these should not derail your long-term retirement goals.

Keep current events in perspective. As bad as the economy is right now, as serious as the market downturn has been, things will not be bad forever. Instead of cashing out your portfolio every time the stock market suffers a substantial drop, establish a long-term financial plan that aligns your portfolio with your personal retirement goals. By resisting the temptation to sell at an inopportune time, you'll sleep better at night, you'll incur fewer transaction fees and other costs, and you'll prevent yourself from turning a paper loss into something more serious.

Reduce debt

One easy way to dramatically improve your financial position is to eliminate any debt that you may be carrying. This simple strategy will accomplish a number of important goals. First, it will increase your disposable income. Second, it will minimize your exposure to interest rate fluctuations, credit restrictions and other macroeconomic events that can sabotage your retirement plans. Third – and perhaps most importantly – it will give you greater peace of mind.

Make it your goal to enter your retirement debt-free. Credit cards are an obvious place to start; mortgages are another. For more substantial debts, consider a consolidation loan – you can often get a better interest rate, and it will be easier to track your progress.

Top up emergency funds

While you're still earning an income, make an effort to build an emergency fund of cash (or cash-equivalent investments, such as GICs, Treasury Bills, or perhaps a money market mutual fund). These funds can be a big help in the case of a financial or health emergency. They can also help shelter your investment portfolio in the event of a severe downturn; instead of having to sell positions at a loss in order to fund day-to-day expenses, you can tap into your emergency fund until the turmoil passes.

How much should you set aside? That depends on your personal circumstances and the stability of your sources of income. Six months' worth of living expenses is a good place to start; you can adjust that figure up or down, depending on your comfort level.

Extend your working life

Perhaps the easiest way to get your finances back on track is to continue working for a year or two beyond your planned retirement date. This can be an excellent way to add supplemental funds to your portfolio and delay taking pension and government benefits (an action which usually results in larger payments once you decide to take them). Perhaps most importantly, earning a paycheque allows you to put off withdrawals from your portfolio. This can give your portfolio time to heal itself and prevent you from selling at an inopportune time.

Keep in mind that such work needn't be full time – part-time or consulting work is just as effective and can often function as a welcome transition into full retirement. Even for those who are already retired, a little work can be a good way to pay bills, while getting your financial house back in order.

Diversify, diversify, diversify

Diversification has long been the key to successful investing. But it's particularly important with a retirement portfolio in need of repair. As you go about rebuilding your investment positions, don't allow one position, or one asset class, or one sector of the economy to dominate your entire portfolio.

Instead, follow the age-old wisdom about spreading your eggs among different baskets. Mix your wealth into stocks, bonds, cash and (if you invest in mutual funds or other managed products) different investment-management styles. That way, your portfolio will be protected should a prolonged period of volatility hit any one of those investments.

Consider taking out a home equity loan

Used wisely, a home equity loan can be an effective strategy for increasing wealth, upgrading or adding value to a real estate investment, or even accomplishing your retirement life goals. Particularly if used for investment purposes, a home equity loan can be a quick and easy way to supplement a portfolio that's in need of repair.

Be careful, though – home equity loans can be a double-edged sword. During retirement, when your ability to pay off the loan is limited, it's easy for high interest rates and heavy fees to quickly eat up a good portion of the equity which you've built up in your home. Bottom line, make sure to talk to a financial professional before you take out a home equity loan.

Reallocate for income

A retirement portfolio serves a different purpose than a pre-retirement portfolio. For one, it needs to support regular withdrawals – potentially even during a severe stock market downturn. Retirees who have had few income-generating assets in their portfolios during the most recent turmoil now realize how comforting it can be to receive a steady paycheque from one's investments.

If your portfolio remains heavily weighted to growth-oriented investments, consider shifting some of that allocation into income-producing assets such as income trusts, government and corporate bonds, preferred shares and dividend-producing common stock. Depending on your personal financial situation, an investment in real estate – either through an income property or a Real Estate Investment Trust (REIT) – might also be appropriate. Ideally, you'll want to make this move a few years prior to retirement, so that you don't buy or sell at an inopportune time.

Review your situation with a professional

Over the past several months, your portfolio has probably shifted from your ideal asset allocation model…perhaps you've even avoided paying attention to the mess. Now is the time to revisit your portfolio and review what needs to be done to get things back on track.

To ensure your long-term financial health during retirement, it's best to review your personal financial situation with an experienced professional, preferably one with several years of experience helping people make the transition from their working lives to their retirement.

Working closely with a financial advisor or personal wealth manager, you should be able to formulate a viable retirement portfolio that not only helps you accomplish your financial goals, but provides you with the means to live a long and happy retirement for years to come.