Retirement Investment Planning Amid Chaos

Retirement Income Planning, Calgary

I remember a haunting scene from a movie about the Nazi Invasion and its attempt to wipe out the Jewish people. There’s a gripping scene where 3 children are being torn from their father and the father begs the Nazi soldier to let his children come with him. The soldier points to the children and says to the father, “you can choose one”. No parent can imagine the horror of having to make such a choice.

There was a sobering scene on the news recently as a Ukrainian mom holds one child in her arms and cries uncontrollably as she mourns for her other child that didn’t survive an explosion.

The horror of war reminds us of the pain and evil that exist in our world. For some reason, we are drawn to pain. We identify with it. It’s a common denominator that we can all associate with. None of us will go through this life and avoid it. 

It’s probably one of the reasons we tune into the news each day to find out all of the bad things happening in our city, our country, and around the world. You have all heard it said, “misery loves company”.

We all feel this need to stand in solidarity with those who are hurt. It is the least that we can do!

As you watch the daily images of innocent people fleeing their country, you are filled with guilt to even be thinking about enjoyment at a time when so many are experiencing such pain. It’s overwhelming and words escape us to understand any of it.

How do we deal with the pain? The weight of being overwhelmed? The feeling of helplessness and hopelessness as we watch these events unfold? I don’t have the answers, but I think we have to talk about it. We can't bury our heads in the sand and hope it goes away.

There's always a crisis somewhere - always has been and always will.

We are just coming out of a 2-year pandemic and now this. We are experiencing increased costs to everything, stock market volatility, major weather events, and loss of innocent lives because of a needless war.

One thing we can agree on is that the world seems out of control. But, does that mean our lives have to be out of control? 

How do we cope and plan amid the chaos?

There are the things that are out of our control:

Think of The Serenity Prayer: "God, grant me the serenity to accept the things I cannot change, The courage to change the things I can, And the wisdom to know the difference.” 

There are too many things to list that are beyond our control and if we spend all of our time and energy on them we will exhaust ourselves and fall into the pit of despair.

We will all feel the pain of this war on Ukraine. The economic sanctions will be far-reaching as we have already seen. Not complaining is an act of solidarity.

These are the things within our control:

Our attitude.

Our perspective. Step away from the crisis and find new surroundings to gain a fresh perspective.

Have a plan for contingencies.

Mike Tyson once said, "Everyone has a plan until you get punched in the face". We are now all getting punched in the face.

Consider the plight of the retiree. You just want to make some money on your money and make sure it lasts throughout retirement. You are not trying to shoot the lights out or hit out of the park. You just would like to have some consistent returns on your investments that can provide the income you need to enjoy your lifestyle.

Just as you get ready to retiree and start taking money out, Putin decides to invade Ukraine and the stock market falls. Super. Thanks, Putin.

He has no idea how hard you have worked all of your life to get to this moment. He doesn't care how much you were looking forward to this. Now the events of this world have sucked the life and joy from you at a time you were hoping that life and joy would radiate from you.

So what do you do?

Work forever. Stay in cash and hope you don't run out too soon. Try and time the markets. Maybe if you sell all of your investments now you can buy them back at a cheaper price at the bottom. Maybe the bottom has already occurred? It's a fool's game.

Here's what you need to do:

Stay the course.

You have to have a workable plan that can give you the confidence to move forward with peace of mind.

Multiple sources of income. Cash reserves. Growth bucket of investments. Income bucket of investments. Emergency bucket. Guaranteed income. Inflation protections. Even a little fun money.

The number one fear that most Canadian retirees face is running out of money.

Because of this fear, it is a reasonable reaction to hold on to your money and not spend any more than necessary and become reactionary. The problem is you will wake up one day with a pile of cash and no time to spend it. You will ere' on the side of caution.

Let's look at some strategies and structures for navigating this complex world of retirement income and investment planning in the light of constant flux.

What's likely to happen?

The crisis will end and life returns to some form of normal. The stock market returns to normal. We don't know how long each correction may take, so your plan has to be based on a reasonable annual rate of return of around 4-5%. This is important so that you can manage your expectations.

Your growth assets will be subject to this volatility and will ebb and flow and will ultimately increase in value along with the markets. You can't run from volatility - it is a normal part of the stock market.

Your income assets are a different story.

You don't want this money gyrating like a drunken belly dancer. You want steady returns. You need a basket full of cash-flowing assets that can offer more stable returns.

Then you have some cash reserves.

There's a comfort balance that everyone has. You should also have easy access to some additional cash in times of increased volatility. If the furnace breaks down you don't want to wait until the stock market rebounds to pay the bill.

Government benefits like CPP and OAS.

These benefits are great in that they can provide a base of income to allow you to always "keep the lights on".

When should you start them?

The longer you can delay starting them the better, in that, you'll get more if you wait. Getting more later in life creates a bigger base for you and put's less stress on your own investments.

However, once you start, you are stuck with them - you can't undo this decision after 6 months of receiving them.

If the markets are too volatile for you or you don't have a large nest egg of cash, you can consider starting your CPP and OAS at an earlier stage in retirement.

The nice thing about retiring and not starting your government benefits is the ability to start at any time you want. You can contact Service Canada and start your CPP and OAS for next month. Assuming you are at the right age - 60 for CPP and 65 for OAS.

Understanding the Cash Wedge Strategy.

This strategy was created by Daryl Diamond from Winnipeg and is outlined in his book, Your Retirement Income Blueprint. What the strategy is recommending is that you always have the next 2 years' worth of income in a near-cash account. At the time of Daryl's writing, you were still able to get some return on cash, but now that's more difficult. Our twist on the strategy is to use a low volatility income portfolio for the “cash wedge” money.

Here's an example: Let's say you need $48,000 per year of income from your investments - in addition to any other source of income. That means that you need $98,000 in your cash wedge. As you enter the first year of retirement you can place $100,000 into your income portfolio - in our case, we use the Nicola Core Portfolio or Dynamic Strategic Yield fund - and you set up a monthly withdrawal of $4000. Before next January you would move over another $48,000 (usually in December). Alternatively, you can use cash for this strategy, but you will only get about a .75% return on that cash as it sits there.

As interest rates rise we should start to see an improvement in annuity rates. Annuities provide a safe and guaranteed income for life with no market volatility or investment decisions to be made.

Home Equity Line of Credit.

Your home represents untapped, tax-free cash flow or it can be a trap of dormant cash. A lot of your wealth is the result of growth in your real estate. You can always tap into that store of wealth by utilizing a home equity line of credit. It's best to set this up before you retire, but it is possible to do it still later. You can also use a reverse mortgage to make this happen, however, we don't like all of the costs associated with setting it up.

Concluding thoughts:

Gather as much information as you can before forming opinions on the events. It’s easy to jump to conclusions too quickly based on either the wrong information or incomplete information. One media source isn’t reliable any longer, so it’s a good idea to get numerous sources.

I have always tried to present things as positively as possible; not because I am the king of positivity, but because I think we have to look for the silver lining in a world of bad news. The alternatives are hopelessness and despair. Not great alternatives.

I believe we have to look for the good, and there’s still good everywhere.

We have to live our lives amid the chaos. We can’t stop living.

We can give. Just google “giving to the Ukrainian crisis and all kinds of options will come up. The Canadian Red Cross is a good place to start if you are not sure.

We can volunteer. 

Accept the short-term pain for the long-term gain.

Enjoying life doesn’t have to be expensive.

What are some of the things that bring you the greatest joy, pleasure, satisfaction, and fulfillment? Go ahead and make a list. Make sure the money you spend is on these things.

Remember, everything in life goes in cycles. The economy. Geopolitical tensions. Relationship dynamics. Avoid making life-altering choices at a time when you are emotionally vulnerable. Wait a few days or weeks and you’ll notice that everything changes. Go for a hike or a road trip so that you can have a change in your scenery and hopefully gain a new perspective.

We are predisposed to think that something going in one direction will continue to go in that direction. When the markets are going up we become greedy and we suffer from fear of missing out.

When markets are going down, we suffer from panic and all of these crazy ideas fill our minds - what if it never comes back? What if this continues forever? I’ve lost all of my money! It’s just not true and history has proved again and again that these movements happen in cycles and continue an upward trend over the long term. Be patient.

"Imagine life as a game in which you are juggling some five balls in the air. You name them - work, family, health, friends and spirit - and you're keeping all of these in the air. You will soon understand that work is a rubber ball. If you drop it, it will bounce back. But the other four balls - family, health, friends and spirit - are made of glass. If you drop one of these, they will be irrevocably scuffed, marked, nicked, damaged or even shattered. They will never be the same. You must understand that and strive for balance in your life.” Bryan Dyson - former CEO of Coca-Cola.

This too shall pass!


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