Hope for the best, plan for the worst

How do you plan for the unexpected?

The other night after speaking to a group of retirees about their investment portfolios, one of the older women in attendance approached me and said, “Do you know what I have learned? Plan for the unexpected. I am living a happy retirement, but after two divorces and a successful fight against cancer, my retirement isn’t anything like the one I originally envisioned.”

The challenge with retirement planning is that, unfortunately, it doesn’t always turn out the way you expected. Recession, divorce, illness: you need to hope for the best, but plan for the worst.

I travel across the country speaking to retired Canadians, and there are a few common themes. The first is that retirees are a pretty content group who are enjoying their retirement and not missing their working life. This isn’t just my observation: recent research by TD Waterhouse shows that the majority of retired Canadians are happily living the retirement they planned.

The second theme is that no one’s retirement plan works out exactly the way that they expected. But, in my experience, those retirees who had a plan for their retirement endured the unexpected better than those who did not.

So, how do you plan for the unexpected? That depends in part on having a good roadmap in place that will allow you to course correct when surprises happen. The bottom line is that you can’t take corrective action if you don’t know where you want to go.

It is essential that you have a clear understanding of what your expenses could be, then look at all revenue streams.

This will help you determine if you need to supplement your income stream by purchasing annuities. To be comfortable in retirement, you ideally want to plan for your basic expenses as well as some comforts to be covered by a guaranteed income stream. Simplify your retirement planning process by consolidating all your investments and insurance with one financial institution so that your plan is easier to manage.

Rising food and energy prices has meant that Canadian retirees are concerned about inflation. Yet, there is the tendency for people to gravitate fully towards secure, but low-return investments as they approach retirement. While investments such as GICs and government treasuries have an important role to play in a portfolio, the challenge is that if your entire portfolio is in low-yield investments, inflation in the long run could affect your purchasing power and potentially reduce your standard of living.

To protect your portfolio from the impact of inflation, one common strategy is to invest a part of your portfolio in equities (preferably large cap blue chip stocks) that can generate income in the form of dividends and also leave some potential for capital appreciation.

Yes, equity markets are volatile, but volatility can be managed. A good starting point for managing the risk is to begin with a balanced portfolio of 50% equities and 50% fixed income. Based on your objectives, you can then tilt your portfolio towards growth or income by increasing allocation to either equities or fixed income respectively. Also, own equities only for the long-term component of your portfolio, say five or more years. Be prudent with the leverage that you use for investing and ensure that you do not have concentrated exposure to any one stock, sector or country.

Take advantage of your company’s health benefits plan and group life insurance. In addition, ensure that you have an adequate amount of critical illness and disability insurance coverage as a way to protect your income.

Retirement planning is dynamic and needs to be revisited on a regular basis. In an environment when so many things are beyond our control it is important to accept that no one is going to care more about your financial future than you.

Financial Post

plovettreid@nationalpost.com

-Patricia Lovett-Reid is senior vice-president of TD Waterhouse