Tag Archives: Investment Risk

BREXIT Impact on Retirement Portfolios

BREXIT Impact on Retirement PortfoliosEveryone is wondering what the long term BREXIT Impact on Retirement Portfolios will be. Markets were down significantly and then have rebounded again. In effect in the short term there has been little impact on portfolios so far. But what will be the long term impact be on your retirement nest egg? If anyone tries to tell you they know, don’t believe them. They just cannot predict what will happen in the future. There are so many financial decisions that will be made by governments over the next couple of years, no one knows. It will take them several years to unwind the UK’s involvement in the EU. So what should an investor do in the mean time?

BREXIT Impact on Retirement Portfolios – Long Term

Bottom line, if you have a well diversified strategy in quality investments stick to your plan. Adjust as you would normally based on your plan and do not make any sudden or emotional changes.

There will be many more equivalent volatile events over the next few years. Investing for the long term means you need to be prepared for this volatility and invest accordingly. If you had spare cash available, you have already missed the window to take advantage of the downturn.

Timing the market is almost impossible for the average investor. Most people are far better off investing for the long term in blue chip dividend paying stocks across a diversified set of companies.

Tolerating investment risk in retirement!

Tolerating investment risk in retirement!Can you tolerate investment swings in your retirement? Do you stay awake at night worrying about your investment nest egg? Do you check the stocks every day to assess the value, the direction and the changes that are occurring on the market? If you do, you may not be good at tolerating investment risk in retirement very well. The chart on the left illustrates the relationship between risk, return and the type of investment that can be in someone’s investment portfolio. Of course for many people they want the high return. But they may not be able to tolerate the high risk associated with high returns.

Tolerating investment risk in retirement!

What is the impact of swings in the market to your retirement? If the market drops by 10% does your portfolio change by the same amount? Are you invested proportionately too high in one area which if it nose dives will decimate your portfolio? Diversity is a key ingredient in retirement investments, really in any investment package. Regardless of how you invest, never put all of your eggs in one basket.

How can you manage and deal with those investments swings? One of the big tests came in 2008 when the markets dropped by more than 50% and portfolios did the same. Many people sold on the way down and never bought back in because they were too scared. They lost big time because the market has rebounded far beyond where it was pre 2008.

If you really want low risk and do not want to worry about your investments, money markets, GIC’s and cash is the investment to choose. Low income will also be the order of the day. At the other end, speculative stocks can deliver high return, but also come with high risk. Can you afford to lose it all?

Most investment advisers recommend a balance approach of high quality dividend paying stocks, mutual funds and bonds, GIC’s and Money Market. There will still be some swings, but not to the same extent that the stock market swings. In addition you will still obtain income from the dividend and interest that you collect from the stocks and bonds, GIC’s etc.

The best approach is to complete a risk assessment, work with your adviser, and take an active role in matching your investments and your retirement expenses to your risk tolerance level.

Retirement Investing: Don’t go it Alone

Retirement InvestingIf you are planning to retire soon and planning to manage your own retirement account, don’t go it alone. Get help with your retirement investing. Take an active part in all decisions. Most of us do not know very much about the details of the investments we have. We participate in a mutual fund which has a combination of stocks, bonds and cash. We leave it up to our financial adviser to recommend something to us.

Then we rely on the mutual fund manager to manage the fund for us. It is a good idea to get advice from people who make it their business to understand the markets, the investment opportunities etc,. Someone has to pay them and that means you. Each time you buy a mutual fund, your adviser gets a kickback. The mutual fund manager  charges up to 2% MER fees in Canada and somewhat less in the US. You make money only after they get paid. In a down year that can mean that your account actually loses money.

Retirement Investing – Invest Directly in Equities and bonds

One way to avoid all of these fees, which are ongoing each year is to purchase equities and corporate bonds directly within your investment plan. You will pay a trading fee initially, but that is the only fee you will pay until you sell the equity. The next thing to focus on is which stocks and which bonds. Use your adviser, do your own research and stay away from speculative and high risk stocks.

In our opinion, consumers investing for retirement should focus on blue chip companies that have a long history of paying dividends and meeting the terms of their bonds. Better still is that these companies pay a dividend on a regular basis they also routinely increase the total dividend from time to time. The same applies to corporate bonds, although in their case the interest paid is usually fixed for the life of the bond. If it is a good quality company, then your risk will be relatively low. We should mention that nothing is risk free and that is why you want to invest in a diverse group of companies so that if anything catastrophic occurs, then your total nest egg is not in jeopardy.

Seek guidance and advice from several people and them make your own decisions regarding the best approach to take with your Retirement Investing! If you worry about your investments and it keeps you awake at night, invest even more conservatively. You may sacrifice some income for less risk, but you will sleep at night.

Young Investors are Hoarding cash

Hoarding cashIt seems that young investors are Hoarding cash at alarming rates and leaving their savings to sit on the sidelines not earning any kind of income. Interest rates on cash investments are at all time lows while the stock market is booming and reaching record highs. So why are these young investors hoarding cash at increasing amount. They are missing out on the stock market gains that have taken place over the last six years since 2008. The markets have almost doubled since 2008 and your investments should have done the same. Sure there has been lots of ups and downs, but the overall trend is aggressively up!

Hoarding Cash – 2008!

The answer is the stock market crash in 2008. Also the corresponding housing crisis that started that year and continued for several years after that. Consumers who owned homes that were heavily mortgaged lost those homes. The value of the homes went down so much, well below the value of the mortgage. The stock market crashed. Anyone  who sold their stocks because they thought they were going lower locked in those losses. They never got back in the market. They lost big time. As we update this post there is another correction taking place in the fall of 2018. It may be time to take advantage of this correction and get back in the market. Invest in dividend paying stocks that have a long history of paying dividends. At least this way you will also derive some income from your investments.

The Answer for Many is Hoarding Cash

Many people are now hoarding cash figuring that if it is not invested in anything risky they cannot lose it. They also cannot take advantage of the increases in the stock market and housing either. The stock market as more than doubled since 2008. Homes are now well on the way to rebounding back to what they were pre 2008. Meanwhile those people sitting on cash are not only missing these gains. They are also losing in another way as well.

Inflation continues unabated at around 2% which means that the $100 in cash you had sitting in the bank last year will only purchase $98 worth of goods today. next year it will only purchase $96 and so on.  Inflation is silent and sneaks up on all of us and if you are sitting on cash you are actually losing money every year. If you have to pay any tax on the small income you do get on your cash, it only gets worse in terms of the money you have to spend on everyday living expenses.

The young investors have missed the boat in terms of the stock market gains, however they can still purchase dividend paying stocks from companies that pay well, have a record of paying every year and have a record of increasing their dividend each year as well.

 

Main Financial Risks in Retirement

Financial Risks in RetirementFinancial Risks in Retirement – Everyone should have a retirement plan in place to ensure that they have explicitly considered, and have strategies in place to address any or all of the issues listed below. When you review the list, you may feel that some of these may not be ever an issue for you. That’s fine, set those aside and focus on those that you are concerned about. If you have time and / or the inclination come back to the others and address them. At least you will have a plan to deal with those issues that concern you the most.

The main Financial Risks in Retirement which may occur during retirement:

Outlive your money: Many people are living longer than their ancestors and their parents these days and as a result must plan for longer life. Running out of money can make retirement very uncomfortable and even miserable. Take stock of your assets and plan withdrawals from your savings in such a manner that they will last beyond your anticipated demise.

  • Ensure a reasonable plan is in place: expense level, income sources, asset draw
  • Develop plan at least five years before retirement, and review it annually

A temporary loss in value of investment assets, resulting in less income: the stock market, the housing market etc appears to take corrections every decade. When this occurs will this impact your living standard and will you be able to sustain your living standard? What plans can you put in place that will sustain your income and allow you to sleep at night without worrying about whether your assets will be available or not?

  • Is this a major proportion of retirement income?
  • Are the investments balanced for regular income, versus growth?
  • Structure portfolio to ensure no income is available for at least a five-year horizon
  • Are guarantees needed to lock in a portion of this income.

Other Risks that Consumers do not Like to Consider

Death of a spouse, and resulting reduction, up to 50%, pension income: we have seen it over and over again. One spouse will die and the company pension plan is halved or eliminated as a result leaving the other spouse without the funds to live comfortably in their remaining years. Decide before you retire if a survivor option should be added to your retirement plan?

  • Is this a major proportion of retirement income?
  • Is life insurance required?

The need for long-term care, resulting in the depletion of assets:

What is the probability that you will need long-term care? Long term care is extremely expensive and all of your assets can and will be consumed if you spend any significant time in long-term care. Can your spouse look after you? Will your spouse look after you?

  • Disability for one, or both, spouses. Others close wishes to retain or live in the home
  • Other assets which can be sold to provide additional funds?
  • Do a long-term insurance analysis.

Continuing elderly parent or disabled child support: who will look after your disabled child when you are gone? How will you work and look after your elderly parents and your disabled child?

  • Is this a large proportion of the expenses?
  • Are RRSPs, and Henson trust in the will.

Inability to handle your financial affairs: this can happen slowly over several years providing you with time to prepare wills etc., or you can be suddenly smitten with a stroke or heart attack leaving you unable to look after your own affairs. What do you do in a situation like this? What does your spouse or family do in situations like this?

  • Ensure that wills and POA’s are in place in advance.
  • Create a complete estate plan: beneficiaries, testamentary trusts, funeral costs.
    Is joint insurance required to cover: estate capital gains and RRIF taxes?
  • Large legacies or charitable gifts?
  • Special circumstances or considerations e.g. business owner?

Summary

We may not have covered all of the situations that we all must deal with in retirement and as we age. However these appear to be the main issues and if nothing else we hope that it will get you thinking about your personal situation and making some plans with regards to those issues. Doing nothing is really not an option although many people do just that and then have to live with the consequences.

Don’t be one of those people. Take control of your life and make sure that you can live the life you want for yourself and do not become a burden for your family. In the end no one wants to be a burden. We all want to be independent as much as we possibly can even if we are incapacitated.

For more information about retirement risk, click here.

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Manage Financial Risks in Retirement

Manage Financial Risks in RetirementWhile everyone should have a retirement plan to help them ensure they will have sufficient funds to see them comfortably through retirement. They should also assess that plan from a risk perspective to ensure that their plan will withstand any curve balls that life throws at them. This is part of the risk analysis that every one of us should be doing to ensure that we and our families have a comfortable life in retirement.  We have put together  a list of 7 items to consider (there are probably more) that a proper plan should consider. Manage financial risks in retirement to increase the odds of a satisfied retirement. If you have these at least considered and have taken mitigation steps then you are well on the way to making sure that you will be ok.

We assume of course that you already have a financial plan in place. If not the first step is to build one and then consider these issues from a risk assessment perspective.

Manage Financial Risks in Retirement

Here is our summary and we discuss each one in a little more detail later in this post.

  • Outlive your money
  • A temporary loss in value of your investments, resulting in decreased income
  • Death of a spouse, decreased pension income
  • Long term care requirements
  • Elderly parent support or disabled child support
  • Inability to handle your financial affairs
  • Special circumstances not in the above such as a business owner

Manage Financial Risks in Retirement – Outlive your money

This is probably everyone’s worse might mare. No one can predict how long you live other than considering actuarial tables, statistics and looking at your own older relatives. We are all healthier now than our parents were and we are living longer.  chances are that you will live at least 5 years or maybe even 10 years more than what your parents did. Tack on another 10 years to your financial plan to see what impact that has on your assets. You may find that you either have to save more , live on less or keep working!

A temporary loss in value of your investments, resulting in decreased income

If you depend on your assets for income and they go down with the stock market, what will the impact be on your plans?  This happens all of the time as we have seen over the past 30 years. What is the impact on your income with a 20 % decline in your asset value? What do you need to do to make your assets less prone to this kind of income drop?

Death of a spouse, decreased pension income

Many spouses depend on each others income to have enough money to live on as well as share expenses. Some pensions drop by half when a spouse dies and at the very least government pensions will stop for the spouse that passed away.  Can you deal with a 50% drop, or do you need additional income sources to protect your self and you spouse in this kind of situation.

Long term care requirements

Sometimes we live a long time, but this does not always mean we have our mobility or our mental faculties with us. Long term care is expensive and you either need to have sufficient funds to cover the expenses or you should have long-term care insurance. Evaluate the impact of one or both of you requiring long-term care?

Elderly parent support or disabled child support

If this is a concern for you and you are near retirement, you may want to assess your parents assets as well as your own and whether you have sufficient funds to pay and provide elderly parent support.

Manage Financial Risks in Retirement – Inability to handle your financial affairs

A stroke or an accident, or some of the other major diseases can rob you of your ability to make your own decisions.  Is your will up to date as well as your power of attorney ? Does the person you have designated know what to do and what your requirements are. Avoid a stranger making these decisions, by having an up to date power of attorney in place.

Special circumstances not in the above such as a business owner

There are thousands of special circumstances that we have not mentioned.  Some will come as a complete surprise, while others will not be much of a surprise based on your family’s situation. Take a moment to evaluate those and decide if you need to do some risk analysis to help you deal with these situations.

This is a start, everyone of us should be doing this sort of risk analysis prior to retirement and after retirement to assess if anything in your savings plans, your retirement age or your life style needs to change!

Top 5 Concerns Consumers have about their Finances

Concerns Consumers have about their FinancesJust read an article about the top five concerns consumers have about their finances and it is not surprising that most people are thinking about – Debt, Savings, Education, Retirement and Health costs. This chart on the left shows where people expect their income may come from as well as the concerns that they have.

Concerns Consumers have about their Finances

Debt

is something that everyone worries about sometime in their lives. Usually when they over extend themselves and also as they are nearing retirement or are about to lose their jobs.  This were a contingency plan comes in. Plan for losing a job, plan for retirement and try to make sure that you never over extend yourself.

Savings

can tie in with having a contingency plan, but savings also means saving for retirement. If you are going to do it right it means you have several different savings accounts – contingency, vacation, something you want to purchase, major repairs to your home and retirement. Sounds like a lot but it is pretty basic and if you fail on any of them you will pay the price at some  point with some hardship that you did not count on.

Education

is important for the kids. Depending on how many kids you have, your plans for them in terms of education etc you will want to set aside a savings plan early that is specifically for the kids to get the schooling they need.

Retirement planning

is so important. If you are lucky enough to have a plan at work your among a minority these days.  Set aside a minimum of 10% and never touch it. Invest wisely and do not use it until you are getting close to retirement. Then evaluate whether you have enough or not with the help of a financial planner.

Health costs

are a big unknown. One day you are healthy and the next day you have major medical bills. Not everyone can afford to have health insurance, so it is a bit of a gamble. People have been known to be wiped out over night due to unforeseen health costs.

Develop a Plan and decrease your Worries

Many financial advisers suggest various methods of dealing with these concerns, however the main thing to do is to have a plan that addresses each of your concerns. No plan, no solution, you are going to be in trouble financially at some point. Put simply the rules are:

  • Pay yourself first – a simple but very effective lifelong approach.
  • Have a plan – and write/type it out, discuss it with people that you respect
  • Learn about tax-saving options
  • Make regular contributions to the tax-savings options.
  • Pay down your most  expensive debts as much and as quickly as you can.

Pay yourself first – a simple but very effective lifelong approach. Figure out a budget and decide how much you can afford. Then pay yourself so that you can enjoy a little bit of life. Just ensure that it is reasonable in relation to the rest of your income.

Have a plan – and write/type it out, discuss it with people that you respect and review it on a regular basis. Some people suggest once per year while others once per quarter. Decide what works for you. If you finances are volatile, then you will want to review your plan more often.

Learn about tax-saving options that are available in your state or province. Decide how to maximize your savings and decrease the amount of tax you pay at the same time.

Make regular contributions to the tax-savings options – Set up a regular deposit to the plan. Your financial institution can help you with this so that it is done automatically and you have a forced savings plan to your tax advantaged plan

Reduce your most expensive debts as much and as quickly as you can. This in turn will control and decrease the amount of interest you are paying and when the debt is paid off, you will get a major raise in terms of more cash to use on other things.

If you share these financial concerns or have others that we did not mention, why not leave a comment for readers. All well written helpful comments will be accepted even with links. All others will be deleted.