Retiring in a down market

Should David live off cash savings instead of selling his investments at a loss?

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Q: We have investments that are set up with a fund advisor and we have a cash account that is currently not invested at all. Our plan is that we will be retired on the 30th of October this year. My question is: should we use the cash to live off of for a period of time to give our investment account time to recover from this downturn?


A: Retirement funding can be challenging. While you’re working, there’s generally a steady stream of income coming in to fund your expenses. Most people have government pensions like Canada Pension Plan and Old Age Security in retirement to provide at least a base for their income, but less and less of us are retiring with a gold-plated workplace pension that replaces our salary.

For those who are funding retirement in part with their investments, sometimes it can be tricky to figure out which account to draw upon. In your case, David, your concern is whether to draw investments or cash. But I would take a more holistic view.

In other words, what are the tax implications of your withdrawals? I assume that at least some portion of your savings are tax-deferred RRSPs and some of the balance may be non-registered or TFSA accounts. If your income is likely to be lower in 2016 and perhaps for the rest of your life—as it is for many people after they retire—you may want to consider non-RRSP withdrawals for the balance of this year regardless of whether it’s cash or investments. This year will likely be a high income year given you will have worked for 10 months.

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Timing the markets is incredibly difficult, David. What goes up, must come down and likewise for a falling market. No doubt it will eventually turn around. The “when” can be tough to determine though, even for the so-called experts.

According to Ned Davis Research, since 1900, there have been 123 U.S. market corrections of over 10%, so about once a year. There have also been 32 bear markets where stocks have fallen more than 20%. During a market correction, stocks recover on average within 10 months. During a bear market, an average of 15 months. But keep in mind, David, these are averages.

Six per cent of bear markets have lasted more than 3 years. So it’s unlikely that stocks will be lower 2 years from now, but they certainly could be lower next year.

That said, here in Canada, the Toronto Stock Exchange was over 15,000 points in 2008. Here we are, 7 years later, with stocks still well below that point.

Assuming that you are planning only a modest drawdown on your investments, it probably won’t make a huge difference in the long run if you start drawing now or wait, David. But if you’re worried about the recent downturn in markets, you might draw cash or mostly cash instead of selling investments exclusively. Just keep in mind – the more cash you draw, the less cash you will have in the future and the more likely you will be forced to draw more from your investments. If markets are lower in a year or two, your strategy will not have worked.

If you look through your mutual fund investments, it’s likely that at least some portion has actually done pretty well this year. U.S. and international markets are still up in Canadian dollar terms year-to-date, so as long as you haven’t held hedged investments, your foreign equities have probably performed alright.

And you may find that you own bond funds that also held up well, that could be sold in favour of stock funds.

Hopefully this situation serves as a bit of a lesson that you need to proactively plan ahead for retirement funding. I wouldn’t be too fussed about timing the sale of your investments though. In much the same way that you can benefit from dollar-cost-averaging as you build an investment account, the same will happen with drawing down.

Most of the time, markets are up and most of your retirement, markets will be up. Invariably, you will sell some of your investments in down markets, David. The most important factor in planning your retirement income is determining a sustainable annual withdrawal and budgeting accordingly.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

2 comments on “Retiring in a down market

  1. Jason: You’ve written a few articles about living off your dividends.
    I know it’s not the perfect strategy but I think having a strong dividend income (if one can achieve it) is one way to help mitigate this scenario where one is faced with a decision of whether or not to sell investments in a down market. Just having that steady stream of dividend income seems reassuring. Configuring a GIC ladder, which you’ve written about too, is another great way, though you do have to replenish it. Even bond funds seem to have taken a bit of a hit these last two chaotic months though obviously not as bad as equities.


  2. What we have done through my RRSP’s, RRIF’s, TFSA’s is for each year 1 to 30 years, each year a different maturity of GIC’s and government strip bonds. They start at the first year, $40,000 and are more each year as interest compounds resulting in $75,000 in the 10th year, $95,000 by the 15th year and $165,000 for the 30th year. We are in year 5 now and are both 70 years old.

    Each year we just continue to review our maturities and add more if needed. we got in with most of our money when they were in the 4.00% to 5.0% range. The best out there now GIC’s, government strip bonds range from 2.5% to 3.5%.

    I also do have some shorter term money that matures in 30 and 90 day increments and are in cashable, redeemable GIC’s, higher interest savings accounts totaling $40,000 or about $3,330 a month in non-registered money. This is already taxed and is about 99% free and clear net balances.

    Our monthly C.P.P, OAS, RRIF income is more than enough to meet our current living expenses, taxes. We are left with about $2,000 a month which we are currently building up a GIC ladder with 1-3 year maturities in our non-registered accounts. We have currently $20,000 there.


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