Should I reconsider my investment strategy as I approach retirement?

02 February 2022 by National Bank
A couple discusses their finances in their sunny, plant-filled dining room.

Retirement is just around the corner, and you’re looking back at how far you’ve come. For years now, you’ve been doing your homework by saving wisely and making annual contributions to your RRSP. But you’re starting to have some concerns about market volatility. Should you rethink your investment strategy to reduce risk as you reach retirement? Here’s our expert advice.

What questions should I ask myself before changing my investment strategy? 

It’s perfectly normal to have questions about your investments. But before you change your whole approach to investing, it’s important to take some time to consider your situation and think about your plans for the future.

1. Has your situation changed?

If your personal circumstances, needs, and goals have not changed and you have a long history of sound financial planning for retirement, you shouldn’t change your strategy.

However, if there have been major changes in your life, such as a separation or job loss, it might be necessary to make adjustments. Even positive changes, like a boost in salary or an inheritance, can be an opportunity to review your retirement plan. Who knows, you may even be able to afford early retirement.

2. Does your current strategy take inflation into account?

When projecting future income, it’s important to account for inflation and cost of living in your calculations to get a clearer idea of the value of your money over time. If you’re working with a financial advisor, they would typically do these calculations for you. Make sure this is the case, for your peace of mind.

If inflation has not been factored in, you may need to save more to make up for the rising cost of living. But don’t worry, there are many ways to catch up on your retirement savings.

3. Is your investment strategy up to date?

Are you still comfortable with the plans you made years ago? Have you regularly adjusted your investment priorities as economic conditions have changed? Are there any ethical concerns you want to take into account? Are you taking advantage of new opportunities in emerging sectors? If you’re happy with your investment strategy and your plan is working, stick with it. If not, set aside a little time to raise your concerns with your financial advisor.

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What are some ways you can adjust your investment strategy for retirement?

1. Aim for a diversified investment portfolio

If you have a good investment strategy, your portfolio should already be diversified. It’s important to maintain a balance between risky investments, to preserve your capital growth, and safer investments, to provide a steady stream of income that stabilizes your portfolio. This kind of balance allows you to stay the course when markets are volatile, while still giving you the opportunity to take advantage of potential market upswings and protect yourself from downswings.

Solid financial planning usually provides for a certain rate of return based on established standards so that you can achieve your retirement goals. If you revise your plan to invest more conservatively, your returns may decrease, and your goals may no longer be attainable. In fact, adjusting your investments to reduce your exposure to risk, particularly risk associated with market volatility, may end up exposing you to another danger—that of reducing the growth of your capital prematurely, to the point where you have no more at all.

Remember that life expectancies are growing longer and longer. What’s more, we’ve seen that people spend their retirement savings over a period of about 30 years on average. It’s important to make sure you have enough money for the rest of your life.

2. Change your investor profile

Institutions that offer investment solutions have developed questionnaires to determine your investor profile based on your personality and risk tolerance. Their advisors can then establish your investment strategy accordingly.

You can update your investor profile at any time, especially when there have been changes in your personal or professional life. Take the time to talk with your financial advisor and remember that emotions can cloud decision making when it comes to planning your financial future.

3. Change the investment profile of your different assets

Your investment portfolio probably includes several types of investments, such as RRSPs or RRIFs, TFSAs, a margin account, etc. Rather than changing your profile for all of your assets, you may want to change it for just a few. For example, you could opt for a safe profile for your RRIF with withdrawals to reduce fluctuations, while taking a more aggressive stance with your TFSA, to enjoy tax-free returns. That way, you protect a portion of your savings while taking a calculated risk on another part of your investments. Which means that in the event of a stock market correction, your whole portfolio won’t be affected.

Should I be saving more as I approach retirement?

If you can, it’s not a bad idea to take advantage of your last few years of work to make additional contributions to your TFSA and RRSP if you have unused contribution room, or to your other retirement funds. This is typically the stage in your career when your salary should be the highest, so you can grow your savings without affecting your standard of living or changing your habits too much. The more you’re able to save, the more money you’ll have to ensure you can enjoy a comfortable retirement.

The right rate of withdrawals can help give you peace of mind.

As you prepare for retirement, the amount of money you save is critical, as is your disbursement strategy. Your plan should set a rate of investment withdrawals that ensures you have enough money to meet your needs, but also keeps your nest egg healthy enough to last for the long haul. If you want to be extra cautious, you can slow down the rate of withdrawals, which will reduce your annual income and extend the life of your savings. The money that remains invested will continue to grow.

What should you expect from a stock market correction?

Sometimes the stock market reacts negatively to current events, causing returns to plummet. These stock market corrections are part of the normal cycle of the economy and shouldn’t be a major concern in the long run. Historically, returns have always exceeded losses on a longer timeline.

Your financial advisor can use simulators to evaluate different retirement income scenarios based on higher and lower percentage returns. If you have concerns, ask your advisor to evaluate your plan with a lower rate to see if it still holds water.

The bottom line is that rethinking your investments as you approach retirement is probably not necessary if you have a solid plan and there haven’t been major changes in your personal and professional lives. The important thing is to maintain an ongoing dialogue with your advisor, as they have the skills to analyze all the variables in the economy and consider your goals and objectives. We’re here to answer your questions.

Our advisors can help you plan your retirement. 

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