July 31, 2020

It may seem strange to talk about financial planning when all of our lives have been upset due to the impact of the COVID-19 pandemic. However, the pandemic has highlighted the uncertainties that we face.  Some of those looking forward to retirement have seen their assets decline in value due to stock market volatility. At the same time, many workers have lost their jobs while most families have had to adjust to taking care of children at home.  Finally, businesses (and their owners) that have had to shut down or curtail operations are suffering substantial losses.   Those affected may qualify for a variety of assistance programs offered mainly by the Federal government. 

THE UNCERTAIN FUTURE

We can learn some valuable lessons from all of this immediate pain.  Recent events have shown us how unpredictable the future can be.  It also helps make us more aware of unexpected events that may   affect us individually.  Changes in our job situation, illness, and the emergency needs of our children and grandchildren can all cause significant stresses in our lives.  We need to be flexible and adjust our spending as events unfold.  Also, we should try to build emergency cushions into our plans.

WHAT WE CAN DO

The uncertainties of life are a strong argument for the establishment of a reserve of liquid assets available to be drawn upon.  While achievement of this goal during the present crisis may not be possible, it can remain a long-term goal.   As part of this process, each family or individual should develop a budget of monthly expenses.  This should include the monthly component of expenses such as taxes and insurance that are paid annually.  Ideally, this budget would be a result of family discussions that would determine which discretionary expenditures were most important.  Where feasible, it would include a monthly amount going into savings.  This monthly expenditure budget should be equal to or less than the monthly after tax income.

If the budget is not followed, going into debt on a credit card is not a good solution.  The additional interest costs incurred will only make the situation worse as time goes on.  The goal is to use a Debit card or to pay any credit card balances by the due date.  If you become burdened by a heavy debt load, you will be beholden to your creditors.

LONG TERM PLANNING FOR RETIREMENT

I would refer you to our helpyouretire.ca website, which provides much useful information as well as detailed personalized analyses of your government retirement benefits. This information, together with consulting your accountant or other professionals, can help you decide when to start taking these benefits.  It can also be helpful in deciding when to stop working.

In forecasting the future, most professionals use reasonable assumptions on investment returns and inflation.  In their calculations, they use your estimate of required constant dollar after-tax income for the future.   As an example, they might determine that you could stop working at age sixty-two and still be able to maintain the target real after tax income until age ninety-five.  While it is not likely, you or your spouse might live to one hundred.  In that event, there would a shortfall in the available after-tax income.  Also, you might have to deal with illness, the emergency needs of family members or poorer than expected investment returns.  These unforeseen events could cause the assets needed for retirement to be reduced.

The answer to this problem is to provide a substantial asset cushion (for unpredictable events) over and above any calculated requirement.  In the example cited earlier, it might mean that you should continue working until age sixty-five instead of sixty-two.  By doing so, you would also increase your Government  Pension Plan entitlement.  There is no harm done in having a little extra money, but it could be quite painful to run short.

CONCLUSION

We should place more emphasis upon the uncertainties of predicting the future.  The COVID-19 pandemic shows us how real these uncertainties are.   Events like this can also have an effect upon future investment returns.   If feasible, we should try in our planning to provide an extra cushion of assets or cash flow.  The idea is to protect oneself and one’s spouse from both general economic problems as well as the personal issues noted earlier.  The key point is to make sure that your financial plan is stress tested.

Elliot Rodin
Bachelor of Commerce      -University of Manitoba
MBA                                       -Harvard Business School