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Investing timeline in retirement (and beyond)

Welcome to December 2020. Did the past year feel both insufferably long and stunningly swift? That’s time for you. It’s among our fastest friends when it’s on our side. But it can be a fierce foe when there’s not enough of it for your best-laid plans to ripen.

For investing in particular, the more time you have, the more near-term market risks you can accept in pursuit of long-term returns. Vice-versa when time is brief. But, there’s an important twist, often left unsaid:

Just because you’re retired (or close to it) doesn’t mean your investments should be too.

We touched on this point in our last post about investing versus preserving wealth. Clearly, our age influences how much longer we can expect to live. But too often, I see retirees misinterpreting what that means to their retirement investments. Concluding their timeline is now much shorter than it used to be, they assume they need to sharply pull back from the stock market to protect their accumulated wealth.

The logic is reasonable enough. In retirement, you’re going to need a dependable income stream to replace your salary. You don’t want an ill-timed market downturn to rip a hole in your essential safety net.

But, for several reasons, this does NOT necessarily mean you should abandon the stock market entirely by putting everything into a “safe” investment like cash, GICs or short-term government bonds.

  1. Safety first:  As we’ve covered before, investment safety comes in several flavours. You may think you’re protecting your wealth by moving it into something safe. And it’s true the face value is preserved. But other risks arise when you stop investing. Most notably, if you stop earning market returns, your accumulated wealth is unlikely to keep pace with inflation. Eventually, this decreases the spending power of your “safe” investments.
  2. Time: “No problem,” you may counter. “My timeline is now shorter. Compared to what the market could do to me, inflation won’t have time to cause serious damage.” In reality, your investment timeline may not be so short. For a couple retiring at age 65, there is a 50% chance one spouse will live past age 90.  Furthermore, the Canadian Financial Planning Counsel (FP Canada) recommends using ages 94 to 96 as a planning horizon for a retired, single 65-year-old; and age 98 for a couple.  Put another way, your retirement timeline could be more than 25 to 30 years!
  3. Income Stream:  Suppose you want to spend $100,000/year in retirement over the next 25 years. That means you’ll eventually spend $2.5 million ($100,000 x 25 years). But you won’t spend that much right away. There’s a subtle, but important planning difference between needing $100,000 annually for the next 25 years, versus needing $2.5 million on day one in retirement. That difference typically translates to keeping a portion of your assets invested in equities, to keep pace with inflation.
  4. Legacy goals: Your investment timeline could leap even further out if you’d like to leave a legacy that will outlive you – especially if you have multi-generational wealth transfer goals.

In short, it’s important to have the income stream you’ll need in retirement, come what may in the stock market. But it’s also important to remember how long you’ll need to keep that stream flowing. For an ample supply, an appropriate mix of inflation-beating stocks and dependable cash reserves remains the most logical and solid approach. What’s the right mix for you, and from where will you generate your income? That’s where your financial planning becomes personal, and where we can help.