Four ways to cope with low returns


Four ways to cope with low returns
  1. Four ways to cope with low returns
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    Personal Finance

If you rely on historical returns to guide your financial plan, then you may want to rethink your strategy. As I argued recently, investors need to brace themselves for substantially lower returns versus what they are accustomed to. It’s a helpless feeling—but investors aren’t completely powerless in this situation.

We can distill your choices in this situation into four options:

Brace for lower returns

  1. Invest (save) more while you’re working

  2. Invest more aggressively

  3. Accept a lower standard of living (income stream) in retirement

  4. Retire later

     

Most people can mix these variables and aim to tweak them to suit their circumstances. Life is about trade-offs and whatever you choose ought to reflect both your situation and your values. I might add that the obvious admonition to lower your costs should go without saying.

Save more in your working years

In working with about 100 hundred families from across the country, I can tell you that the appetite for putting aside more money is still quite low. Anyone in the lowest tax bracket (under about $45,000) needn’t save much—and ought to be investing in a TFSA when they save. Wealthy people (say those with a personal income over $150,000) should aim to maximize both RRSPs and TFSAs. Obviously, the more you make, the more you should be willing and able to save. Setting aside 10% of earned income is a bare minimum and if you want to a comfortable retirement then you will likely need to set 15% of your income. But if you plan to retire early then you’ll likely need to set aside 20% of your income to make that happen.

Get aggressive

As a general rule, most people’s tolerance for risk is fairly stable over time. If you’re counting on your portfolio for income then you’re likely to be more sensitive to the lower returns because retirees can’t capitalize on market dips the way people who are still working can. But that said, I don’t generally counsel people to invest any more aggressively than they have in the past—assuming their risk tolerance was properly calibrated in the first place. This is a good time for investors to reexamine their risk profile and to consider whether they can take on more risk. If you are comfortable taking on more risk then consider increasing equity exposure by an additional 10%. One of my favourite phrases for this decade has been “70/30 is the new 60/40”.

Of course, if you’re working with an advisor answers to a compliance department, a 10% variance from your long-term goal is likely all that will be tolerated, so don’t go overboard.

Lower expectations

Accepting a lesser quality of life is the sort of thing that no one willingly chooses. For some retirees reading this, however, it might be the only remaining workable solution. Of course, this should only be a last resort if all else fails.

Hold off on retirement

The ultimate guide to the Canadian Couch Potato Portfolio

That leaves us with the option of retiring later in life than we may have originally expected. To me, this is the easy winner in the great retirement multiple choice contest. First off, most people are living much longer than earlier generations have. Life expectancy has been increasing by about two years per decade for a few decades now. In short, someone who is 30 years younger than you might reasonably expect to live six years longer than you do – all else being equal. It’s simply not reasonable to expect to live longer than ever before, but not have any more money than ever before.

I’d like to encourage people to split those extra years of their lives equally between work and play. For every decade that you are older, consider working (and playing) a year longer because you’ll likely be living two years longer than someone who is a decade older than you. The rule of thumb that I’m fond of is to use the decade of your birth to be the last number in your retirement age. Those born in the 5…

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