Riding the market rodeo in retirement

Retirees, like many other clients, can be emotional and extremely reactive to market shocks. And understandably so. After all they only have a fixed nest egg that must see them through their retirement years.

So how can their advisors prepare to handle frequent fluctuations in their mood and needs in such tumultuous times?

Retirement planning experts say it is challenging but there are strategies to overcome emotion. As a preemptive strike against market gyrations, many of these strategies are baked into retirement planning well before the client retires.

Peter Drake, vice-president, retirement and economic research, with Fidelity Investments Canada, says the key lies in the retirement planning process.

“One of the things that can do financial advisors a tremendous amount of good is to educate their clients about the way markets behave,” says Drake. “The other thing that the advisor does is set up a long-term investment plan and then a retirement income plan.”

A carefully crafted long-term plan for the individual’s characteristics makes it easier for the client to have a balanced view of portfolio performance. “Part of the retirement income plan is that the retiree will have looked at their expenses [and] divided them into essential and discretionary, and will have already figured out how to cover their essential expenses from sure-fire sources of income.”

These sources of steady income include government benefits, company pension plans and annuities, and tend not to fluctuate with the markets, he adds.

The underlying mantra that Drake lives by is “events come and go, the [planning] process endures.” And it’s this process that gets clients through tumultuous times.

The process also requires financial advisors to respond to clients’ actual needs when they appear to be in a fantasyland. “Sometimes the advisor needs to look the client straight in the eye and let them know frankly and firmly that they can’t afford certain things and recommend that they stop thinking about it,” says Drake.

When clients lose sight of their retirement goals every time there is a major market event, the advisor should bring their focus back to their priorities and the financial plan, says Lee Anne Davies, head of retirement strategies, RBC

“When the market volatility occurs and they start to get anxious about it, first think about your priorities and if they changed; secondly, acknowledge that during this period of volatility you don’t need your entire nest egg, what you need is the cashflow to fund the next few months of your retirement.” says Davies.

The trick is to make sure clients don’t lose sight of their retirement goals and panic when there is a major market event. “During times when you are feeling insecure about what’s happening in the economy and the markets, we always go back to what their priorities are and what has changed,” says Davies.

Also, use of credit in retirement can be of huge strategic significance, she says. “In these low interest rate times, credit can actually work very well for you, so don’t touch your investments, use credit as an interim strategy and then use the investments when the markets change again,” says Davies.

When markets swing savagely, a lot of rules go out the window. The only all-weather rule is remain diversified and don’t put all your eggs into one basket.

A balanced diversified portfolio provides effective insulation against market upheavals, says Tina Di Vito, head of the BMO Retirement Institute. “The reason you have cash, the reason you have bonds is to have a balanced portfolio so that it’s shielded from some of the volatility that happens,” she says.

It is almost impossible to predict the timing and the extent of the next round of market rodeo. Making the portfolio immune to market volatility, therefore, is the only way to stay on top, she adds.