If you rely on historical returns to guide your financial plan, then you may want to rethink your strategy. As I argued recently, investors need to brace themselves for substantially lower returns versus what they are accustomed to. It’s a helpless feeling—but investors aren’t completely powerless in this situation.
We can distill your choices in this situation into four options:
Invest (save) more while you’re working
Invest more aggressively
Accept a lower standard of living (income stream) in retirement
Most people can mix these variables and aim to tweak them to suit their circumstances. Life is about trade-offs and whatever you choose ought to reflect both your situation and your values. I might add that the obvious admonition to lower your costs should go without saying.
Save more in your working years
In working with about 100 families from across the country, I can tell you that the appetite for putting aside more money is still quite low. Anyone in the lowest tax bracket (under about $45,000) needn’t save much—and ought to be investing in a TFSA when they do save. Wealthy people (say those with a personal income over $150,000) should aim to maximize both RRSPs and TFSAs. Obviously, the more you make, the more you should be willing and able to save. Setting aside 10% of earned income is a bare minimum and if you want a comfortable retirement then you will likely need to set 15% of your income. But if you plan to retire early then you’ll likely need to set aside 20% of your income to make that happen.
As a general rule, most people’s tolerance for risk is fairly stable over time. If you’re counting on your portfolio for income then you’re likely to be more sensitive to the lower returns because retirees can’t capitalize on market dips the way people who are still working can. But that said, I don’t generally counsel people to invest any more aggressively than they have in the past—assuming their risk tolerance was properly calibrated in the first place. This is a good time for investors to reexamine their risk profile and to consider whether they can take on more risk. If you are comfortable taking on more risk then consider increasing equity exposure by an additional 10%. One of my favourite phrases for this decade has been “70/30 is the new 60/40”.
Of course, if you’re working with an advisor that answers to a compliance department, a 10% variance from your long-term goal is likely all that will be tolerated, so don’t go overboard.
Accepting a lesser quality of life is the sort of thing that no one willingly chooses. For some retirees reading this, however, it might be the only remaining workable solution. Of course, this should only be a last resort if all else fails.
Hold off on retirement
That leaves us with the option of retiring later in life than we may have originally expected. To me, this is the easy winner in the great retirement multiple choice contest. First off, most people are living much longer than earlier generations have. Life expectancy has been increasing by about two years per decade for a few decades now. In short, someone who is 30 years younger than you might reasonably expect to live six years longer than you do – all else being equal. It’s simply not reasonable to expect to live longer than ever before, but not have any more money than ever before.
I’d like to encourage people to split those extra years of their lives equally between work and play. For every decade that you are older, consider working (and playing) a year longer because you’ll likely be living two years longer than someone who is a decade older than you. The rule of thumb that I’m fond of is to use the decade of your birth to be the last number in your retirement age. Those born in the 50s might retire at 65, people born in the 60s might retire at 66, while people born in the 70s might retire at 67…and so on. Due to increased life expectancy, it is entirely possible that even with later retirement ages, future generations may spend more years in retirement than any generation before them.
Bonus option: Ease into retirement
More evidence is coming forward that people who stay engaged in the workforce longer, generally live longer after they retire—assuming you love what you do. If possible, you might want to consider easing into retirement. I was born in the 60s and expect to be working just as hard at age 65 as I am now, but I plan to retire before I turn 70. Not everyone can transition to part time work en route to full retirement, but it provides the double benefit of maintaining connectivity and delaying portfolio withdrawals (even if saving is no longer practical as a part-timer).
A big part of why people expect returns to be lower is demographics. Fewer of us are working and the number of savers is about to surpass the number of borrowers. Rates may stay low for the rest of our lives. With debt levels (both personal and public) at all-time highs, there’s really no room left for further fiscal stimulus, either. Low growth is the new normal. Your planning choices should reflect that reality.
John J. De Goey CFP, CIM, FELLOW OF FPSC is a Portfolio Manager with Industrial Alliance Securities (iAS) and the author of The Professional Financial Advisor IV. The views expressed are not necessarily shared by iAS.