Three retirees face financial reality

Some of the worst performances by financial markets since the Depression threw the plans of many 50-plus Canadians off the rails. Those with defined benefits from company or government pension plans may have to scale back expectations based on other income sources. Without pension plans, others are looking at postponed retirement.  Here’s how three 50-plussers, each with very different goals and aspirations, are facing the challenge of paying for their retirements.

Do your homework
Nancy Bergeron*, 64, has more modest expectations. A widow, living in Montreal, on a $700 monthly government pension, Bergeron was a musician with the Montreal Symphony before she quit working more than 30 years ago to stay home and raise six children.

When her husband died in 1984, she invested $35,000 from his estate in an annuity, which grew to $108,000 and paid her a monthly income. But nine years ago, concerned that her children would not have access to the money at her death—the guaranteed payments would die with her—she redeemed it.

Then, with advice from a stockbroker and her own research, she invested $100,000 — 33 per cent in equities, 4per cent in bonds and 24 per cent in mutual and segregated funds (the rest is in cash). In the last two years, she has watched her nest egg drop 15 per cent to $85,000. 

“It scares me. I do have four more years until I have to roll over my RRSP to a RRIF [government rules require RRSPs to be converted to income-paying vehicles by the end of the year you turn 69]. I think in four years my plan will come back up. If I could get back to my $100,000, I would be happy.”

Bergeron lives on a budget  based on her pension.  She is mortgage-free after paying cash for a duplex two years ago (one of her daughters lives in the other half of the duplex). And Bergeron earns a little working seasonally at plant nurseries and writing for horticulture magazines. Another bonus is that her 85-year-old mother recently gave her $37,000. She also expects to inherit a modest amount. But from here on, says Bergeron, her retirement savings strategy is “safe, safe, safe. I won’t be doing any risky things. My children won’t be getting very much of an inheritance.”

Bergeron also wonders in hindsight if she should have simply deposited the cashed-out annuity into a bank account at two per cent interest. She wishes she had relied more on her own instincts and less on advice from her broker. “You have to do your own research. And if you don’t know anything about it, you’d better not buy it.”

Next page: Drive or stay in neutral?

* names have been changed to protect privacy

Drive or stay in neutral?
Vince Richards*, 59, is retired but still gets an early start to the day. The Toronto resident is up by 6 a.m., in his tracksuit and at his computer, reading investment newsletters and browsing the Web for financial news. He spends most of the morning watching the markets and business reports, taking breaks for a walk, shower and house-husband duties. 

Richards has every reason to pay close attention to the financial news, no matter how bad it gets. Two years ago, he sold his small business and invested the proceeds with the intention of living off the interest from what he made. Since then, he’s watched his retirement savings nosedive along with the market. As with most retirees and those near retirement, he is especially anxious because he has a shorter time horizon than younger people do.

Richards calls himself “a typical middle-aged blue-chip-stock person.” His asset allocation used to be 60 per cent bonds and 40 per cent stocks. At the tail end of the stock market boom in 2000, he changed strategy and switched to a 60 per cent stocks and 40 per cent bonds.

“It’s the old cliché — everyone’s a genius during boom periods. Fortunately, I wasn’t in that extreme. I tried to find blue-chip stocks that paid a dividend and paid me interest that would be tax-advantaged.” The decrease in the portion of capital gains that must be included in taxable income — down from 75 per cent to 66-2/3 per cent, then to its current level of 50 per cent in the year 2000 — also encouraged Richards to tip the balance from bonds to stocks.

Sell out to sleep at night
Richards’ financial vigil paid off before things got out of hand during the bear market of 2002. “I picked up that something seemed to be going wrong. So I actually was able to get most of my capital out of the market, even though my stockbrokers were telling me not to do it. But I kept going and reinvesting a lot of money until about May 2002. I still found Canadian stocks that seemed to perform.” Then the Canadian market was hit. Says Richards, “I had to question staying in the market for a steady, predictable income or selling out before I lost capital. And in the end, the decision was to sell out so I could sleep at night.”

For now, he’s moved his money into short-term investments — money market funds and treasury bills — which pay very little interest but are safe. And he thinks he’ll be parked there for quite a while. With his family’s welfare dependent on his investment capital, he’s very wary of reinvesting in the stock market. His wife, 57, has postponed plans to join him in retirement, so they continue to have one regular income. Their two children are grown and working, but Richards worries they could wind up back home if the economy affects their jobs. Neither Richards nor his wife has a employer pension plan.

He finds himself envying the retired teachers and government workers he knows for the pensions they’ve earned. “Maybe they’ll only get 60 to 70 per cent of what they made. But they’re still going to get that amount. With both of us, after we stop working, it’s down to zero.” He and his wife intend to continue leading a quiet life — no big travel plans, just more time at the cottage. In fact, says Richards, the cottage has become a safety net, property they can sell if they need more capital. Right now, they’re aiming for an annual retirement income of $100,000 before taxes, which he admits may be high. “But you have all these considerations. You want to keep saving money for your children. You worry about your health when you’re older. So the grand plan is to keep saving, even when we retire.”

Next page: Count on the long term

Count on the long term
Mel Kaye*, 60, knows from personal experience that financial know-how offers no guarantees for protection when the market dips more than anyone could have predicted. Just before his 58th birthday, he retired from his job as financial vice-president of a national drug store chain. His wife, now 55, retired at the same time.

He retired with a full company pension and intended to augment it with investment returns. His daughter is a single mother with a son, and Kaye says they need financial assistance. He set up a retirement plan that was 40 per cent dependent on the income from his investments, which included bonds and some income trusts, but no mutual funds.

This investment portfolio was 70 per cent stocks — “blue-chip stuff” — a mixture of Canadian and American companies, with virtually no technology or high-risk stocks. He checked monthly on the state of his finances and did a quarterly review of the companies in his portfolio, trying to guard against any huge negative surprises.

“When the market started to act up, I got depressed, and I also had a sense of immobility. I didn’t see any move I could make that would help me under those circumstances. There was nothing I could buy [or sell]. There was nothing I could sell. It just seemed I was in a helpless position.”

Kaye estimates he and his wife lost 10 per cent of the assets they invested.

“When I looked each day at what had been eroded, I’d think I can’t earn that kind of money anymore. I’m incapable of replacing that capital once it’s gone,” says Kaye. “And that gives you a hollow feeling.”

At the same time, he’s philosophical about the situation and is counting on long-term trends to sort things out. “If you don’t wait until this trend sorts itself out and starts heading in the other direction, it’s going to wind up costing you. So just look beyond it and try not to let it get you down. If it affects your health, then you’ll suffer even more.”

Next page: Lessons learned

Lessons learned
Mel Kaye, Nancy Bergeron and Vince Richards have different retirement circumstances. Yet all believe equities are their best bet for building long-term returns, and all are counting on a market rebound. Nonetheless, they also say they’ve learned a great deal from their recent investing experiences.

Buy quality and a mix
The first piece of advice: if you’re counting on stocks for part of your retirement income, you need to buy quality. Then, you must ensure you have a proper mix of assets — stocks, bonds and cash — whether you hold them as straight assets, insured funds or mutual funds. Consider more complex instruments, such as income trusts, only if you understand what they are and you’re comfortable with them.

Bob Pollock, a certified financial planner (CFP) and owner of the Money Concepts franchise financial services business in Fort Richmond, Ont., agrees that equities are what you need for long-term growth in any retirement plan. Pollock works exclusively with mutual funds and his criteria for selection could be applied to any investment.

“I look for funds that invest in stocks that can be bought at a reasonable price, funds with good management and long-term growth prospects,” says Pollock. “Those are the companies that are going to do well in the long term and provide a good return for their shareholders. I tend to avoid funds that invest in high risk or high growth areas because those stocks are not consistent with long-term investment approach.”

Investor Kaye advises buying into companies and services you like and understand. He doesn’t have stocks in resource companies because he has never understood the market forces behind this industry. And he won’t buy a thinly traded stock, where few trades are taking place.

Take an active interest in your own portfolio
The three retirees have used stockbrokers but advise taking an active interest in your retirement portfolio nonetheless. They say you know your own interests best, so don’t rely solely on financial advisers to make all the decisions. Ken McNaughton, a CFP and director of the elder planning division of Zlotnik, Lamb & Co. in Victoria, agrees that it makes sense for his clients to be involved. Although he is paid to plan for people, he doesn’t want them “sitting there passively and following me like a sheep. I want them to know why we’re doing what I recommend.”

Richards, with his daily routine of market watching, is the most active trader of the three retirees. He has three full-service accounts, so he gets analysts’ reports and advice from a variety of experts and sources. Both he and Bergeron emphasize not buying anything without careful analysis of companies, fund managers, sales and earnings, growth figures and good reviews from at least three sources. And, they say, you can find a great deal of financial information online. Richards finds some of the financial forums whose participants include like-minded investors quite helpful. “There are a lot of retired people taking part in these forums, and there’s a lot of wisdom there.”

Invest for the long term
All three are taking their own advice about staying the course. Once you’re satisfied you’ve set up a good investment portfolio, don’t panic. Says Kaye, “Try to avoid an attitude of getting rich quick in the market. It’s a marathon. It’s not a sprint.” The analogy is apt. Those at or near retirement watched the market “hit the wall” in the past year. The fervent hope is for a second wind soon so retirement investment plans can cross the finish line.