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By David Field, CFP
Special to the Financial Independence Hub
If you’re a retiree or looking to retire soon, the COVID-19 Coronavirus is likely causing you anxiety about your finances: and I want to help relieve it.
As a financial planner, I’ve spent the last couple weeks providing guidance to my clients during this tumultuous time.
While I have no medical advice to offer (nor should I), nor do I have any way to predict the future, I’ve heard some very dangerous generic advice regarding people’s personal finances.
Simply advising people to “wait for the markets to go back up, and all will be well” ignores the fact that you may need income now, meaning you can’t just “wait it out.”
If you are retired, or looking to retire soon, here are seven actions you can take now to help reduce your financial anxiety.
1.) Create or maintain a cash reserve
Having cash easily accessible gives you options, especially in stressful times. There is a lot of noise out there in the financial media suggesting that “stocks are on sale right now,” and, as a result, you should allocate some of your resources to buying them.
If you are close to retiring (in the next year or so), or you are retired, I advise you to make sure you have enough cash to cover your living expenses for the next three years.
Then, and only then, if you have cash left over then you may want to take advantage of depressed stock prices.
2.) Sell your bonds, not your stocks
If you need to create cash, don’t sell your stocks: sell your government bonds. Assuming you have a balanced investment portfolio, you likely have government bonds somewhere in there.
With stocks decreasing, along with interest rates, those bonds have increased in value. This is why you have government bonds as part of your portfolio. (Be careful: don’t mistake government bonds for corporate bonds when selling your bonds.)
If you are in balanced mutual funds or ETFs, you may not be able to sell just your government bonds. If you sell your balanced mutual funds or ETFs to create your cash reserves, you’ll likely suffer some investment losses: but those losses should be much smaller than if you were to sell all-equity funds or ETFs.
Human behaviour causes us to want the safety of government bonds when we see our stocks decreasing in value: that means we’re selling stocks at a discount and buying government bonds at super-high prices. Try to avoid this behaviour, as it means your portfolio will get hurt on both sides.
3.) Postpone your retirement date, if you can
If you were planning on retiring soon, I recommend delaying implementing that decision by at least a few months. (The exception would be if you have a defined benefit pension that will provide most of your retirement income, and which gives you a defined retirement date.)
Once you start your retirement income, which is likely to come from many different sources, it can be difficult — or even near impossible — to make changes. With the COVID-19 virus changing the narrative every day, there’s a ton of uncertainty out there; meaning it is likely prudent to hold off retiring if you can.
In addition, if your employer needs to reduce its workforce in response to the current crisis, there may be some attractive options or financial offers that provide incentives for you to retire. If this happens, any kind of severance will provide an income cushion before you start your retirement income.
4.) Cut back spending
The math is very basic: If you reduce what you spend, then you will require less income from your investments.
While this is always the case, right now cutting back might be easier than ever. With vacation plans cancelled or postponed and no sports, music or performances to go to, it may be easier to save money than if you’ve tried in the past.
5.) Expecting a refund? File your 2019 tax return ASAP
If you’re still working and you’re expecting a tax refund, completing your 2019 tax return sooner will help you get that refund sooner.
Then, when you get that cash, just keep it in savings. Don’t spend it. Keep it for when you need it.
If you think you may owe tax, on the other hand, hold off on filing your return. The Government of Canada may make some changes to the deadline for filing your taxes.
(I have no idea if they will, but we are still over a month from the filing deadline.) In that case, you’ll still have a tax bill, but a filing-date delay may allow you to hold onto your cash longer to protect you in an emergency.
6.) Remember: Government income remains the same
If you are receiving some income from the Government of Canada — like your Canada Pension Plan benefit, Old Age Security, Guaranteed Income Supplement or any disability benefits from the Canada Pension Plan or provincial benefits — they will continue as before.
If you have a workplace pension that pays you a guaranteed amount for life (Defined Benefit Plan) then those amounts will also continue as is.
7.) Focus on the big picture
In times of stress and high anxiety, it can be difficult to stay focused on your long-term financial plan. All the “noise” and quick advice may sound wise, but when you take a step back and look at the bigger picture, keeping your long-term goals in focus and avoiding a short-term focus may be the best course of action.
If you’re facing retirement and feeling some financial anxiety, I hope these seven points can help bring calm and guidance to your personal situation. As always, if you’d like personalized advice and support, I’m only a phone call away.
David Field is an advice-only Certified Financial Planner® and Certified Cash Flow Specialist™ and founder of Papyrus Planning. He is the co-creator of the CPP Calculator.
