In spite of the market losses experienced by most Canadian investors during the financial crisis, many people are still looking to their investment portfolios to fund their retirement. According to a recent survey by Ipsos Reid for the Canadian Securities Administrators, 44% of Canadians plan to rely on their own or their household’s investments for their income, or they plan on cashing in their investments for a source of retirement income.1
But while markets have been gaining ground in the last few months, financial education expert Jim Yih, author of ’10 Things I Wish Someone Had Told Me About Retirement’, says the one thing we know for sure is that the market moves in cycles. For many people, retirement can last for decades, through various bull and bear markets. So how can you make sure your nest egg is protected as best as it can be from future economic or market downturns?
Being engaged with your money and evaluating your portfolio is key, says Yih. This involves not just meeting with your advisor on a regular basis, but coming to the table with good questions. Here’s a look at some of the important questions you should ask your advisor, to ensure your portfolio is as protected as it can be.
1. “How much did my portfolio change during the downturn, why did it change and how can we create more certainty in the future?” While many people are happy at the moment with the market’s recent highs, Rein Selles, a Professional Retirement Planner, educator and co-author of ‘10 Things I Wish Someone Had Told Me About Retirement’ suggests asking your advisor these questions now – as by the time the market drops again, it could be too late to make the necessary changes. He suggests looking at the types of structural changes you may need in your investments to help you sleep at night.
2. “What is the worst loss I can expect with my current investments?” This is a critical question, explains personal finance expert Gail Bebee, author of ‘No Hype – The Straight Goods on Investing Your Money’. “I think the big realization for many people is that they did not have the appetite for risk they thought they had, and a lot of people also did not realize how much risk was in their portfolio,” she says. Yih explains that you need to understand risk capacity – how much risk you want to take, as well as how much risk you need to take. Depending on the size of the nest egg, some retirees don’t need to take on much risk with their portfolio, he says. It is important that pre-retirees have some of their money in safe, guaranteed investments, despite the currently low returns, he says, because it gives them control and predictability over their planning.
3. On the flipside, Bebee says the other consequence of the downturn is that many people aren’t ready to take on any risk, so there’s a lot of money in bond funds, guaranteed investment certificates (GICs) and cash-type investments. As a result, “What would happen to my portfolio if inflation took off?” is another question to ask advisors, she says. “If your portfolio has got too much fixed income in it and inflation takes off, you can really be hammered in terms of losing purchasing power, so you want an advisor who has at least thought about that possibility and puts some investments in your portfolio that would go up with inflation,” she says.
4. “What does conservative mean to you?” Yih recommends really delving into this question with your advisor, as the definition of what constitutes a conservative investment can differ between individuals. “If I said to you conservative means not losing any money at all and the other advisor says, well it means having a blend of stocks, bonds and cash and being diversified, which one resonates more with you?” he says. “You just have to understand the perspective of the advisor if you’re going to engage with an advisor,” he adds.
5. “What is my current withdrawal rate from the portfolio?” To protect yourself against the worst possible case, you should also ask your advisor how much you are currently taking out, and at this rate, how long your money will last if the stock market performs poorly, says Bebee.
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