Navigating the Retirement Red Zone: Part 2
On the morning of December 6, 1917, as the First World War raged in Europe, two cargo ships the SS Imo and the Mont-Blanc, moved toward each other in a skinny channel known at the Narrows that connects the Halifax Harbour with Bedford Basin. Amidst heavy boat traffic, both ships were forced to the same side of the channel, and even though they were over a kilometer away from each other, it became clear they were on a collision course. Although the ship captains went through various protocols to avoid each other, the ships collided.
The impact was relatively minor. The consequences were anything but.
The Mont-Blanc was carrying fuel and explosives and the collision started a fire on board. Twenty minutes after the crash, the explosives ignited creating the largest man-made explosion the world had seen.
This tragic episode in Canada’s history contains two key lessons for individuals in the retirement red zone.
First, it can be difficult, even with the best intentions to recover from a dangerous course. It is important to create a retirement savings plan and to follow it.
Second, even if the initial impact of a financial decision seems relatively minor, the effects can be detrimental and long lasting. Every financial decision has the potential to impact your retirement life in ways that it is hard to predict, and therefore, each decision requires careful consideration and strategic planning.
Here are five more tips for your decade before retirement.
Study your budget to help better estimate your retirement financial needs
It might seem tedious, but it’s essential. You won’t know how much you need to save unless you know how much you spend. Most people want to maintain a similar pre and post retirement lifestyle, so an effective way to estimate your financial needs is to make a detailed budget of your costs and spending as you approach retirement and adjust your retirement plan accordingly.
Plan for your vehicle needs
Often our vehicle needs shift during retirement. You may have had a truck provided by work and retirement will force you to look for a new car. Or maybe you want to trade in a minivan for an SUV. Whatever the reason, buying a vehicle while you are still working can make things much simpler. Most notably, the financing terms available are often better when you can demonstrate that you are receiving employment income. You may also be more equipped to pay the higher insurance, taxes, and licensing fees that new cars have when you are working. If you are planning on keeping your vehicle into retirement, but want to replace it down the line, setting aside money for a new vehicle might be a good solution.
Consider adjusting your asset allocation to reduce sequence of returns risk
Sequence of returns risk refers to the chance that your investment returns will be poor just before or just after retirement. If you’re forced to withdraw from your portfolio while it is in a loss position, it can be extremely difficult to climb out of that hole and maintain financial stability throughout retirement. Diversifying your portfolio to include stable assets like cash and bonds is a useful way to diminish your sequence of returns risk. Having a couple years’ worth of withdrawals in less risky assets is a good rule of thumb. That way you can make withdrawals from your stable assets giving volatile investments (like stocks) the time required to bounce back if there is a decline in the market.
Think about making home renovations while you have employment income
Many people want to make alterations to their homes during retirement. Renovations can help make your house more livable as you age or increase the value of your home before you sell. Regardless of the factors motivating you to renovate, it is wise to try to finish any updates before you retire. Renovations often run over budget and having employment income to account for this variability is vital. If you wait until retirement to make renovations and the costs get out of hand it can have an outsized impact on your retirement savings.
Explore your health insurance options
In Canada, we are fortunate to have basic health care, but this doesn’t cover all our daily needs or expenses. As you approach retirement it is useful to explore your health insurance options. If you have existing health insurance with your employer, check if you are able to extend your plan into retirement (some providers will allow it). You can also shop around for new providers, but be careful, because they might not cover existing conditions. Another good practice is to try to select your coverage based upon your personal needs. If you need regular physio or extra eye care look for plans that cover most of these costs. Self-insuring is always an option too, but that comes with additional financial risks that it’s important to budget for.
Whether navigating a narrow channel, or planning for retirement, accounting for the various potential contingencies in advance can help you find a safe course. Failure to do so can be explosive.