COLUMN: Ask the Money Lady – Bull and bear markets

Dear Money Lady Readers:

I want to ask – for those of you in your 50’s or 60’s…what’s your plan for retirement?

I hope you have thought about it. Today let’s talk about how to not outlive your money.

We all know planning is important. They say: “the person who doesn’t plan for the future, can’t expect to have a future.” And we all know this to be true. So why is it that today we have over 40 percent of retirees falling into the “retirement gap.” The new term, retirement gap, means that retirees are finding that the money they planned to live on, in reality, now falls short every month. Being in the retirement gap is not a good thing and if you know your in it than you also know you will need to either get a part-time job, adjust your spending, or downsize your home and your lifestyle.

First up, you want to make a list of all your monthly expenses, including mortgages (or rent), utilities, heat, hydro, condo fees, estimate for groceries, car payments and gas for your vehicle, memberships, subscriptions, and basically everything that you spend money on each month. Are these expenses going to continue in retirement, and if so, for how long?

Of course, if you plan to travel in retirement, then I will want you to decide how much you plan to spend every year and have this divided by 12 months and added in to your monthly expense list. Now that you know how much you will need each month when you retire – do you have a plan to create a revenue stream to cover these expenses. This revenue will need to be funded by investment portfolios, RRSPs, TFSAs, pension income, rental income, CPP and OAS.

While you may think you have enough funds to retire, please remember that timing your withdrawal from any investment is truly the key to ensuring your money lasts. If we take a typical retirement time horizon of let’s say, 25 years and you are withdrawing a monthly retirement income from an equity portfolio, you will need to account for three to five downward swings in the market. Because you are essentially creating a revenue stream from your portfolio it is important to remember that the cyclical trends that help build your savings, now works in reverse. Over a 25 year time period, due to bear markets, a retiree will need to consider that they will lose anywhere from 20 percent to 46 percent from their overall capital savings if held in an equity portfolio. Remember this is like dollar cost averaging but in reverse – because you are now withdrawing funds on a monthly basis, not saving them.

Another thing to consider is the state of the economy at the time you wish to retire. If you retire during a bull market, you will be much better off than someone that retires in a bear market. You see, positive returns early in retirement outlast an identical portfolio that has to endure negative returns early in retirement. This is called the “sequence of returns risk” and please believe me, this is a true event. Economists have shown that when you compare portfolios with the same securities and values, and with the same average long-term rate of return, the timing of the withdrawals does make a difference.

The fact is, bear markets will happen throughout your retirement, and they will affect your savings plan. Since 1940, we have had 15 bear markets with the average length being 11.2 months in duration and an average loss of 31.8 percent. The best way to combat this phenomenon is to have your fixed monthly expenses covered by your guaranteed income (OAS, CPP, Pensions, LIRAs). If you can do that, then you could potentially withdraw less during bear markets and more when we have a bull market. Bull markets typically last for about three to four years and have an average return of 148.7 percent over their past bear market. Don’t be put in a situation where you are forced to sell securities in a down trending market. Selling in a bear market creates capital loss because once the securities are cashed out, they can no longer participate in the eventual recovery.

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Christine Ibbotson is a Canadian finance writer, radio host & YouTuber. For more advice check out her YouTube channel: ASK THE MONEY LADY – Your Canadian Finance Coach.