How to handle market ups and downs

It’s been a wild couple of weeks for the stock market, with enough ups and downs to spark recession-era memories.

Fortunately, it looks as though the volatility is more garden-variety correction than another major downturn, but investors have still been affected. Over the last month, the S&P/TSX Composite Index has fallen by about 4%, while the S&P 500 has dropped by about 2.5%.

It’s easy for Canadians with long-term time horizons to recover from market swings, or even a 2008-style equity selloff, but it’s a different story for retirees. Many are actively selling their RRIF investments to pay for their day-to-day living, or drawing on income generated by equities. If the market declines, they’ll have fewer savings to use.

A September 2010 study by Wellesley College professors Courtney Coile and Phillip Levine found that a market drop in the lead-up to retirement impacts how much money people will have in their golden years.

In their paper, they wrote, “Long-term declines in stock prices when workers are in their 50s and 60s subsequently lower their incomes when they are retirees in their 70s through a reduction in investment income.

“Falling stock prices harm the well-being of more-advantaged older workers by preventing them from retiring when they want and reducing their retirement income.”

Clearly, a plummeting market can ruin even the best-laid plans. So what can advisors do to ensure their clients’ post-working savings are safe?

Setting the right return

Cynthia Kett, a CFP and principal at Toronto’s Stewart & Kett Financial Advisors, has been working with retirees for years. When she creates financial plans, she makes sure to set goals that take volatility into account.

“Say you set a rate of return of 5%. You know you won’t track that return every single year,” she says. “Some will be better, some will be worse, but you want to hit the average.”

Retirees have longer time horizons than many people think, she says. Advisors need to look at retirement planning from the day the client cashes his or her last cheque to the day that person passes away. Of course, no one knows how many years that will be, but it could be a decade or two.

Kett typically creates retirement plans that look five to seven years in the future.

Set aside savings in bonds

While many people move money from equities into bonds as they age, Kett suggests going further and putting a set amount of money into a GIC or short-term fixed income instrument that can fund daily income needs.

Buy securities with a finite maturity date, she says, and spread out those dates. For instance, if a client knows he or she will need $100,000 in the first year of retirement and another $100,000 in year two, move that money into a short-term fixed income product that matures next year and another one that comes due the year after.

“In a year or two’s time, you’ll know that maturity is coming up and you’ll get that money,” she says. “You don’t have to worry about whether the market is up or down.”

Spend less—at least temporarily

This might be a tough one for some clients who are used to a certain lifestyle, but if the market falls and income is affected, then retirees may have to put a hold on some of their spending.

While many people think that retirees are on fixed budgets, in reality, many can cut back in certain areas, says Kett. The first expense to go will likely be travel.

“They may have built $10,000 a year into their budgets for vacations,” she says. “That may have to be put off.”

After vacations and other big purchases, look at reducing some fixed costs.

“There are ways to pare back grocery bills,” says Kett.

If a proper plan has been created, and volatility has been accounted for, then your retired clients should be just fine. However, you still may have to reassure them that their plan is still on track.

“We’ve had some clients ask about whether or not they should be concerned,” says Kett. “We tell them, ‘No, we knew this might happen. That’s why we set your asset mix the way we did.’”