Retiring in a down market can feel unsettling. After years of carefully saving, it’s natural to feel anxious when your portfolio dips just as you’re about to rely on it. However, with the right planning, even a significant market crash doesn’t have to derail your retirement goals.
Understanding Sequence of Returns Risk
A primary concern when retiring during a downturn is the “sequence of returns risk”, the risk of experiencing poor market returns early in retirement. Early losses can significantly impact the longevity of your retirement savings. Two retirees with identical portfolios can experience drastically different outcomes, based purely on the timing of market returns in their early retirement years.
Fortunately, prolonged downturns are relatively rare; most bear markets recover within a few years. The key to managing sequence of return risk is having flexible withdrawal options and a well-balanced portfolio, so you’re not forced to sell investments when prices are down.
Building a Resilient Portfolio
A well-balanced portfolio is essential as you approach retirement. While equities offer long-term growth, relying too heavily on them can expose you to sharp losses during market downturns. Incorporating more stable investments, such as bonds, Guaranteed Investment Certificates (GICs), and short-term fixed-income assets, can provide a buffer against volatility. These lower-risk assets not only help smooth out returns, but they also serve an important purpose: covering upcoming expenses without needing to sell equities when markets are down. This ensures you can maintain your retirement income needs with greater peace of mind, regardless of short-term market swings.
Flexible Withdrawal Strategies
Traditional guidelines, like the 4% withdrawal rule (initially withdrawing 4% of your portfolio and adjusting for inflation annually), may need adjustments during market volatility. Temporarily reducing non-essential withdrawals in response to market downturns can significantly extend portfolio longevity. Delaying discretionary expenses, like travel or large purchases, can give your investments time to recover.
Additionally, using alternative income sources such as dividends, interest, cash reserves, or part-time work can help you avoid locking in losses during market slumps. History shows that investors who remain invested through downturns experience better long-term outcomes compared to those who panic sell.
Leveraging Guaranteed Income: CPP and OAS Strategies
Canadian retirees have access to reliable income streams such as the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) and Old Age Security (OAS), both indexed to inflation and government-backed. Strategically delaying CPP and OAS can significantly boost your guaranteed lifetime income, reducing the pressure on your investment portfolio, particularly during volatile markets.
Delaying CPP/QPP from age 65 to 70 increases your payments by up to 42%, and OAS payments rise by up to 36%. By postponing these benefits, you’re essentially buying inflation-protected, government-backed lifetime income.
Smart Tax Planning for Retiring in a Down Market
Tax-efficient withdrawal strategies during downturns can enhance your financial position. Utilizing lower-income periods to strategically withdraw from RRSPs or RRIFs can minimize taxes and future mandatory withdrawal requirements. You may also consider realizing capital gains in lower-income years.
When Retiring in a Down Market, Maintain Behavioural Discipline
Behavioural finance reminds us that emotional resilience is as critical as financial preparation. Even if you anticipate that you will retire in a down market, avoid frequent portfolio monitoring during downturns, as this often exacerbates anxiety and encourages reactive decision-making.
Staying focused on income generation rather than fluctuating portfolio values can reduce stress. If pension, CPP, and OAS cover essential expenses, short-term market declines become less impactful. Consulting regularly with your financial advisor can also provide necessary reassurance and help maintain a disciplined approach to your long-term retirement plan.
