Warren Buffett famously said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”

As you transition to retirement, you are going to enjoy the shade from the tree that you planted many years ago. Although the stresses of your career and work will disappear, they may be replaced with some new retirement-related stresses. Your investment strategy has now changed from contributing to your portfolio to withdrawing from it so that naturally causes a shift in mindset as well. The stress that comes from this transition usually relates to these questions:

1. Will I outlive my savings?
2. What will happen to my retirement lifestyle if the stock market declines?

Careful financial plan

The first question is a common concern amongst most people. If you have a defined benefit pension from your employer, then this won’t be an issue, but most people don’t. Over the past several decades most employers have eliminated these pension plans due to the cost, so employees are now on their own to manage their investments. This naturally results in the stress associated with outliving your investments. However, this isn’t necessarily a bad thing if you have taken the appropriate steps. The key is to have a financial plan prepared by an advisor to project the cash flow you will need during retirement and the investment returns you should reasonably expect.

A properly prepared plan will start with you sitting down to write a list of your monthly living expenses and your discretionary expenses, such as travel. If you haven’t done this yet, then you need to sit down with an advisor and do so before going any further. This will give you a set of scenarios that are essential to determining if your investment portfolio is sufficient. If you don’t do this, then the default is trying to manage your investments to get as high a return as possible with the hope that it will be enough to cover future cash needs. The stress associated with this situation is obvious. The market return will vary, and it will cause you to look at short-term news every time you hear about a market decline. That can make for a difficult retirement period.

Preparing for negative years

The second question seems top of mind for most investors right now. We have just finished three years of strong growth in the Canadian stock market, and there is a fear that a decline is around the corner. While nobody can really predict when the decline in the stock market will come, it is safe to say that there will be a negative year at some point.

The question is how should you prepare for it? When you are contributing to your portfolio, you can take solace in a market decline by knowing that your new contributions are buying stocks at a low price. However, when you are withdrawing, the opposite happens because you run the risk of selling your investments at low prices.

The way to manage this is to ensure that you have enough of your portfolio allocated to bonds so that you can ride out the financial storm. A general rule of thumb is that you should project how much you expect to withdraw in the next five years and put that amount of your portfolio in bonds. This would allow you to sell a portion of your bonds during a market decline to fund your cash flow needs until the stock market has recovered. At that point you could start withdrawing from your equity portion again and rebalance the portfolio to your original allocation.

Anomalies vs expectations

The other point to note on a market decline is that any properly prepared financial plan should include scenarios which include periodic market declines. From 2005 to 2025, the S&P/TSX300 went from approximately 11,000 to more than 31,000. However, it had negative returns for five out of the 20 years. This shows that market declines are not anomalies but rather something that needs to be considered when projecting investment returns. You could avoid the issue by investing everything in bonds, but the problem is that your after-tax return would not even meet inflation in most years, hence causing your portfolio to deplete faster. Accordingly, the growth of the market is a necessity for a proper retirement plan, but it should build in an anticipation of regular market declines.

Once you have the above set up, then the shift from working to retirement should be straight forward and stress-free. You can apply for your CPP and OAS ahead of your anticipated retirement date and set up monthly withdrawals from your investment based on your financial plan. Structure these in a tax efficient manner and the transition should be smooth. Instead of getting a pay cheque from your employer on a fixed monthly date, you will now be receiving your pay cheque from your investments. If your advisor has put a plan in place to handle the transition, then there is no need for stress. If you haven’t put a formal plan in place yet, then now is the time to find an advisor and set one up.