Market Volatility and retirement: the impacts

02 March 2023 by National Bank
Illustration of a sailing boat representing a retirement project for an article.

When the stock markets are volatile, it’s perfectly normal to be concerned about your savings leading up to retirement. Whether you’re preparing for retirement or already enjoying it, here’s some advice to help you get through this instability.

How will market volatility impact your retirement plan?

You’ve no doubt noticed that your assets set aside for retirement have dropped in value.

If you’re invested in the stock markets, then your investments will likely be affected by market volatility. In most cases, retirement plan calculations—as long as they’re done well—should consider market fluctuations over a long period.

So even though your investments have fluctuated, it’s best you stick with your planned strategy.

You’ll come out ahead if you stay invested in the markets and let your money work for you. That way, you’ll be able to enjoy the capital you’ve accumulated when you’re ready to retire.

How should you react to market volatility if you’re already retired?

Make sure you have enough cash to make your planned short-term or long-term withdrawals.

If you’re worried, you can delay some expenses. Travel plans and renovations can be put off until things calm down. This will allow you to alleviate the financial pressure and keep enough cash aside to take care of more urgent needs.

Remember to always invest with your head and not your heart. That’s why you can count on your financial advisor to help you make informed decisions.

In spite of this, if you believe that your retirement savings are in danger, that may be because your portfolio doesn’t match your needs or your risk tolerance. Once again, talk it over with your advisor before making any quick decisions.

How should you adjust your retirement plan when the markets are volatile?

If you haven’t retired yet, the best thing to do is continue contributing to your RRSP or TFSA.

Think about your retirement savings growing over the long term (over years and even decades). In the end, a temporary situation like market volatility will have had only a small impact on the capital you’ve accumulated over 20 or 30 years. In other words, stay the course and wait for things to get back to normal!

Should you review your investments?

Not necessarily. It varies on a case-by-case basis, especially depending on how prepared you are for retirement.

If you still don’t have an investment strategy, or if you’ve invested sporadically, speak with your advisor as soon as possible. Together, you can create an investment strategy that fits your financial situation.

If your financial situation hasn’t been shaken up by the situation, stick with your strategy.

Should you delay or speed up your retirement?

The answer depends on your personal situation and that way your income has been affected. A retirement plan is usually set up with a long-term horizon, which takes into account market fluctuations.

If you’ve lost your job and it’s compromising your savings, you could think about delaying your retirement.

However, if you’re in your sixties and aren’t working, but your investment strategy is stable, you could retire sooner, especially if you think it might be hard to find a new job in your field.

Should you assess your cash levels?

It’s always a good idea to check your cash levels. Even if the situation is stable and the economy is getting back to normal, you never know what the future holds. That’s why it’s important to have an emergency fund.

It’s recommended to save three to six months’ worth of expenses (rather than income) to deal with the unexpected, such as a loss of employment. This is especially important for low-income workers, freelancers, and those in high-risk industries.

The less leeway you have, the more important it is to have enough cash and not compromise your retirement plan.

Should you review your budget?

You should definitely review your budget when the markets are volatile. It’s a good opportunity to take stock of your excess spending and rethink your financial habits.

If you don’t have an emergency fund, update your budget and make this a priority.

If your financial situation is stable and your income hasn’t been affected, now is the perfect time to increase your investments to prepare for your retirement.

Should you review your financial plan?

Your financial plan doesn’t necessarily have to be reviewed. You don’t need to change your financial plan just because the current marketplace is volatile.

Financial plans are projections that consider long-term stock market cycles, including both downturns and upswings.

If your financial situation has changed in terms of income, when you plan on retiring, your goals, or even how much you can save, it may be a good idea to review your plan.

Otherwise, keep the status quo. Finally, even if there’s no change, a simple chat with your advisor could alleviate any doubts about the solidity of your plan.

Remember that history has shown us time and again that a sharp drop in the stock market is always followed by an upswing. Don’t make hasty financial decisions that you may regret in a few months, or even a few years. If your heart is telling you to act now when the markets are volatile, the best thing to do is speak to your advisor.

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