COVID-19: Financial planning for retirement in a downturn
To sell or not to sell
The impact of COVID-19 on stock market performance is leading many retirees and those close to retirement to question their investment strategy—but what’s the right approach?
COVID-19 cases, job losses, and oil price shocks. Every day the barrage of news is unrelenting. The impulse to react, and to protect what we have, is strong. The uncertainty in North American stock markets, having initially dropped more than 30 percent from their all-time highs, presents retired Canadians or those close to retirement with a tough choice—to sell, or not to sell? This financial stress can also impact decisions on when to retire.
The volatility in the stock market does not necessarily mean that investors should reconsider their retirement date or recalculate their potential spending in retirement. It’s worth remembering that retirement planning and financial planning, in general, are not “one-and-done” exercises. It’s much better to think of them as fluid, and as requiring regular revision. Investors who own a diversified portfolio of individual stocks directly, or indirectly through a pooled fund, mutual fund, or exchange-traded fund, should keep in mind the stock market itself will not drop to zero. An assessment of prior bear markets by Invesco highlighted that the average bear market since 1957 has lasted just under 12 months, with the average loss being 34 percent . At the outset of the Great Depression in 1929, it took 30 days for US stocks to fall 20 percent and enter a bear market. In contrast, this recent downturn took only 16 days—the fastest bear market in the history of the S&P 500.
Reassessing investment strategies
Given these conditions, COVID-19 highlights two important aspects of asset allocation. First, risk tolerance assessment is especially important to ensure investors are not taking on more risk than they can handle in the event of a stock market downturn. It’s hard to anticipate stock market declines, and investors shouldn’t blame their investment advisors for not avoiding stock market losses. This month has been a good test for determining how much exposure investors should have to stocks in the first place, and this should be an important discussion point as client visits to advisors increase in the wake of the crisis.
Second, while 2019’s strong stock markets caused investors’ stock exposure to creep up as a percentage of their portfolio, they should have also been selling stocks to maintain their ideal asset allocation. Similarly, as stocks have fallen, prudent portfolio management suggests buying stocks to rebalance back to target, not selling as some investors may be tempted to do. It may seem counterintuitive to buy stocks when markets are falling and sell them as markets are rising, but rebalancing by buying low and selling high can help investors make unemotional investment decisions.
 Strategic Insight, “Canadian Investment Funds Industry: Recent Developments and Outlook”
The economic impact of the COVID-19 pandemic is also reinforcing the importance of time-horizon financial planning for retirees. Recent retirees or those who are soon to retire will be concerned about seeing their portfolios decline as they enter the next phase of their lives, but an important consideration for these investors is how much of their investments they will actually need in the next year. Ideally, a recent retiree shouldn’t be withdrawing more than five percent annually from their portfolio, though this may vary depending on personal circumstances. This is more important during market down years when their portfolio has been impacted, and should lead to them reconsidering leisure travel and real-estate purchases.
For investors nearing retirement, the good news is that they will probably not need any of the money in their portfolio over the next few years. Even after retirement, they may only need to withdraw a small portion of their investments within the first few years. Retirees with registered retirement income funds (RRIFs) can also take some solace from the fact that the federal government recently announced that RRIF minimum withdrawals have been reduced by 25 percent for 2020, as a temporary measure . Before investors abandon their long-term financial plans, advisors must remind them that the best option when planning for retirement is to stay the course. This isn’t our first bear market, and if history has taught us anything, it’s that the market will recover.
 Financial Consumer Agency of Canada, “Canadians and their Money: Key Findings from the 2019 Canadian Financial Capability Survey”
As for advisors, they must remember that COVID-19 and the looming recession it has launched will only exacerbate their clients’ anxiety and aversion to loss. Clients are looking for reassurance about their investments, and they may already have fallen into a downward spiral of constant news and social media, with hourly updates about the state of the markets and the spread of the virus. This may lead some to believe they must act immediately. Those nearing retirement should be encouraged to take advantage of financial planners and rely less on advice from friends, family members, or the internet. In the words of David Lewis, chief client officer at BEworks in Toronto, “the average investor doesn’t have the expertise to separate the nonsense from the good advice.” Lewis also points out that the internet has damaged the idea of expertise and provides a soapbox for anyone with an opinion .
So where does this leave advisors? I like the advice given by Craig Basinger, chief investment officer at Richardson GMP in Toronto, who says that advisors have a unique opportunity to help their soon-to-retire clients become smarter consumers of news: in particular, they should encourage clients to listen to opposing perspectives as a way to address their confirmation biases, and to discourage panic selling .
We may be in uncharted waters now, but the lifeline within our grasp is the opportunity to offer better advice to clients. If we do that, we’re not only helping them now, we’re setting them up for a stronger future.
 AITE 2019 Q2 survey of 400 US-based advisors
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