Clients who haven’t reviewed plans for a while, particularly those in or approaching retirement, may need reassurance.Dragon Claws/iStockPhoto / Getty Images
With markets whipsawing again this week – reacting to tariff escalations, rumours of 90-day pauses, and then to actual pauses – retirees may be understandably concerned about what it all means for their retirement plans.
Owen Winkelmolen, an advice-only financial planner and founder of financial planning platform Adviice.ca, says these are the moments when having a stress-tested retirement plan pays off.
Mr. Winkelmolen, who’s based in London, Ont., says his clients are feeling secure after scheduled retirement plan updates in January and February during which they discussed the previous year’s strong returns and the likelihood of stocks reverting to the mean. “We already innoculated clients a little bit,” he says.
But clients who haven’t reviewed plans for a while, particularly those in or approaching retirement, may need reassurance. He spoke with Globe Advisor about stress-testing their plans, when it’s time to make adjustments, and why most clients needn’t worry.
How do you stress-test a retirement portfolio for environments like this?
Most retirement plans are a lot stronger than people realize. Typically, when we’re stress-testing a plan, we use aftcasting. We find that’s fairly valuable because [clients] get to see how their retirement plan performs during actual historical periods. We can say, ‘That’s the Great Depression, that’s high inflation in the 1970s,’ and they get to see with actual returns how bad their retirement plan actually could be. For the most part, they’re quite successful. Maybe they run out of money 10 or 20 per cent of the time, but 80 per cent of the time, there’s typically quite a lot of money left over.
And now we might be in one of those historical periods?
We don’t know. What we look at is those lower lines [on the aftcasting chart] that end up going to zero, and we say, ‘This is the path where we need to be worried.’ A 10- to 20-per-cent dip is usually not even close to where we need to be worried. When we’re talking about potentially running out of money in the future, we’re talking about fairly extreme events for a typical retirement plan. If we see your portfolio drop by 30, 40, 50 per cent, then we’re starting to get worried. But a 10 per cent correction is still well within that normal range.
If you get into that extreme range, what do you start to do to adjust the plan?
Usually, for a retiree, it’s making an adjustment to their spending. The model will automatically tell us the adjustment required, and it’s often quite small. It’ll say, ‘If you cut spending by $500 a month – $6,000 a year – we can increase the success rate to X. If we cut spending by $1,000 a month – $12,000 a year – we can get to Y.’ So, already the client has a sense of, ‘If things go to the extreme, this is the action I would need to take.’
The other thing to highlight is that a typical retirement plan for average Canadian households – say they’re spending $75,000 a year after taxes – usually half of that is coming from Canada Pension Plan [and] Old Age Security for a couple. The portfolio’s usually providing half of their retirement income, if that. So again, the reduction in spending is usually much smaller than people realize.
What about options for clients who are approaching retirement? What does a drawdown like this do to those plans?
The timing of retirement is important [and so is] having the right asset allocation for their risk tolerance and risk capacity. We also stress-test their plan as they’re approaching retirement to get a sense of what sort of market change might impact their retirement age.
One of the crazy things about retirement planning is adding six months, 12 months of employment income can be quite effective. You’re not drawing on the portfolio in those six months, you’re adding more to your investment account; you’re waiting for that recovery if one’s going to happen. You’re usually getting more CPP benefits because you’re paying in; you might be getting more [workplace] pension because you’re still paying in. So, we might look at delaying retirement. But for most clients, it’s not necessary.
This interview has been edited and condensed
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