A financial plan for your extended retirement

Imagine if your retirement lasted as long, or longer, than your working years. It's a possibility for a growing number of the population thanks to medical advancements and longer life expectancies.

Today, a 60-year-old has a 25 percent chance of living until age 97 and a 50 percent chance of living to age 94, according to the Financial Planning Standards Board. If you are part of a couple, there's an increased chance of one of you living past age 100.

While reaching centenarian status may sound exciting, it might mean some Canadians are at risk when it comes to maintaining their lifestyle. Less than a quarter of higher income Canadians are ahead of their wealth goals, according to a 2019 Ipsos survey, commissioned by RBC Wealth Management, while almost half are less wealthy than their goals.

Research by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management, has found that older generations* in Canada say one of their most important financial goals is protecting their wealth for their future well-being. Moreover, just 50 percent believe they still have enough time to accumulate significant wealth.

The New wealth rising survey targets high-net-worth individuals (HNWIs), adult children of HNWIs, and high-earning professionals across Canada, the U.S., UK, China, Hong Kong, Singapore and Taiwan. It looks at the shifting landscape of global wealth, where wealth will be, what it will be invested in and how it will be invested.

With the largest transfer of wealth in history underway, major attitudinal shifts are emerging. Interests are swinging from local to global, smart philanthropy is taking hold, and impact- and alternative investing are going mainstream. As wealth shifts—globally and from one generation to the next—the influence of affluence will change.

Even those who feel they have comfortable retirement savings may be at risk in what many economists are forecasting will be a prolonged low-growth, low-interest rate environment in the years ahead.

“Longer retirements, which necessitate more money, and a potentially lower rate of return, together make retirement more daunting,” says Eric Lascelles, chief economist at RBC Global Asset Management.

The concern is traditional bonds and guaranteed investment certificates — fixed-income securities typically relied on by pre-retirees and those in retirement— won’t produce yields as high as they have in previous decades. Stock market returns may also be more muted in the coming years, especially when compared to the 10-year bull market that followed the 2008-09 global recession.

The new search for yield

The potential for longer retirements and lower investment yields means investors may need to consider different ways of structuring their portfolios. In years past, the general consensus was investors should hold a percentage of stocks equal to 100 minus their age. That thinking may no longer apply to investors near or in retirement today. In other words, a portfolio with 60 percent fixed income and 40 percent stocks may not be enough for a 60-year-old investor to generate sufficient returns for the next few decades.

Options for these older investors might be to put a higher percentage of their portfolio into equities, seek out different types of bonds, such as corporate or emerging market products, or consider alternative assets, such as real estate or private equity.

According to the EIU data, 45 percent of older generations say they anticipate moving to less risky investments in the next five years. Additionally, both younger* (79 percent) and older generations (86 percent) agree it's more important than ever to future proof one's wealth.

“There is a search for yield out there,” Lascelles says. “To some extent, seeking additional yield means taking additional risk, yet it has to be approached with caution.”

Since more people are living longer and could have longer retirements, Lascelles says some investors may feel comfortable taking on more risk in their portfolios, even later in life.

“Investors who don't need to take money out of their portfolio for the next 20 years can perhaps afford to be more heavily weighted towards the more volatile stock markets, relative to the more safe bond markets,” he says.

Lascelles says long-term investors should also distinguish between volatility and risk: Volatility often happens over a shorter time period, whereas risk is usually associated with generating returns needed over the long term.

The ‘right’ withdrawal rate

Many investors rely on the ‘four percent rule,’ when planning how much money they'll need in retirement. The rule, introduced by financial planner William Bengen in 1994, suggests investors withdraw four percent of their portfolios per year for 30 years.

Tony Maiorino, head of RBC Wealth Management Services at RBC Wealth Management, says investors should use a withdrawal rate that takes into consideration their personal retirement needs and goals. “It all depends on the lifestyle you want in retirement,” he says.

The withdrawal rate will likely fluctuate over time, Maiorino says. For instance, some investors may want to withdraw more money earlier in retirement, for travel or to purchase a vacation property, while others may wish to take out less to help ensure they have more funds later in life to cover health care costs if their health deteriorates.

According to the New wealth rising survey, 36 percent of younger Canadian respondents say one of their most important financial goals is saving for retirement. Older generations say having enough to support their lifestyle is important to them (57 percent).

Maiorino recommends investors work with a wealth advisor who can help them develop a long-term financial plan. An advisor can help figure out the best withdrawal rate for the individual investor, based on their age and personal circumstances.

Protecting a portfolio during volatile times

A sound financial plan can also have funds set aside for when markets are more volatile. Maiorino says retirees should have an emergency fund — similar to what experts recommend people have in their working years should they lose a job and need to cover a few months of expenses.

For retirees, Maiorino says the money should be set aside in more liquid assets, such as cash or a short-term savings vehicle, for when markets are volatile, or if there's a market correction or recession. “You want liquid cash available so you can leave the investments to do what they're doing, and use the investment capital to fund your short-term needs,” he says.

The goal is to not withdraw money in equities when the markets are down. In the industry, the concern is known as “sequence risk,” or “sequence-of-returns risk,” and can be detrimental to the growth of a portfolio longer-term, especially for those early in retirement. For example, if an investor took money out of their portfolio in the fourth quarter of 2018 when markets dropped, they likely missed out on the upswing in the first half of 2019.

Stick to the plan

Regardless of how long you work, or what your plans are in retirement, Maiorino says investors should seek expert advice and have a financial roadmap to guide them. And, as they get older and their lives change, the plan should be updated to reflect it.

To truly enjoy retirement, no matter what that stage of life looks like, Maiorino says investors need to stay disciplined. “The reality is: wealth is not simple. Stick to the plan and work with your advisor to make sure you're always in your comfort zone.”