The risk that new retirees face now that we’re in a trade war

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Seeing markets tumble is never a pleasant experience, but it’s especially painful for new or soon-to-be retirees, who are watching the value of their nest egg tumble right before their eyes.

On Tuesday, U.S. President Donald Trump imposed 25-per-cent tariffs on most Canadian goods, and 10-per-cent tariffs on energy and critical minerals. Canada’s main stock index reacted swiftly, falling to its lowest level in nearly two months.

For those already retired, it’s a frustrating but familiar blow. Over the past five years, retirees have weathered crisis after crisis, from the pandemic to multiple wars and surging inflation.

But this latest wave of uncertainty is landing at the worst possible time for those entering retirement: just as they’re starting to live off their savings for the first time.

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“If you’re brand new into retirement, this is really terrifying because the first couple of years in retirement … it’s very difficult psychologically,” said Colin White, certified financial planner and chief executive officer of Verecan Capital Management.

Those early years are some of the most vulnerable financially, too. After decades of saving, retirees are suddenly drawing from their nest egg instead of building it. The fear of seeing savings shrink can push people into making panicked financial decisions that do more harm than good, experts say.

“You’ve given up your sense of being, you’ve given up your sense of control and all of a sudden the whole world seems to be working against you,” Mr. White said.

But the biggest risk in those early years isn’t just market losses, it’s how retirees react to them.

One of the most dangerous mistakes, according to David Popowich, senior wealth adviser at The Popowich Karmali Advisory Group, is what he calls a “flight to cash.”

When markets drop, people often panic. They sell investments to protect what’s left, but that decision often locks in their losses. Most investors never buy back in at the right time, leaving them permanently worse off, said Mr. Popowich, who noted that almost all of his conversations with his clients lately involve talking about tariffs.

What makes the early years of retirement especially risky is something financial experts call “sequence of returns risk.” If markets fall right after someone retires and they start withdrawing to cover expenses, those losses can compound faster than if the same downturn happened later in retirement.

Advisers say the best way to guard against emotional decision-making is to build a plan that’s designed to withstand downturns.

One method is the cash-wedge strategy – setting aside a portion of your portfolio to cash or cash-like investments to help meet immediate expenses, while leaving the rest of the portfolio invested.

“It allows us almost to build in an emergency fund within that retirement strategy,” said Desmond Nwaerondu, a Calgary-based certified financial planner at Sun Life.

Mr. Popowich recommends setting aside up to 10 years' worth of retirement income in safe, low-risk vehicles such as GICs or high-interest savings accounts. That way, retirees can ride out market downturns without being forced to sell investments at a loss.

But not every retiree can afford to set aside a decade’s worth of cash. Those with smaller savings should keep at least two years of expenses in liquid assets – enough to weather short-term crises, Mr. White said.

The good news is that not every part of a retirement plan is at the full mercy of the markets. Government pensions such as CPP and OAS are guaranteed and indexed to inflation, offering a stable income base that rises with the cost of living, Mr. Popowich said.

To help clients stay the course, Mr. Popowich runs Monte Carlo simulations – a financial planning tool that models how a retirement plan would hold up under thousands of different market scenarios.

“This kind of uncertainty is just simply part of the experience of the markets and of retirement,” Mr. Popowich said.