Financial planners don’t like to talk about an unanticipated crisis or black-swan event. Ask them for advice on what to do if you suddenly lose your income, suffer a massive loss of assets or encounter some similar financial devastation and, to a person, they’ll tell you that if you had come to them in the first place, you wouldn’t be in this position now. That’s why they’re called planners and not, say, financial emergency responders.
But even people who plan ahead can stumble into economic calamities.
The 2008 recession saw many people’s retirement plans derailed or delayed. The leaky condo crisis of a decade ago drowned many people’s home equity. A health crisis might not bankrupt Canadians with hospital bills as it does many Americans, but its accompanying loss of income can take a chunk out of savings. And one thing even the most diligent financial planner might be timid about asking clients is whether they plan to divorce – an increasingly common phenomenon late in life that can slash a household’s income in two.
These are not cheery topics. But the scenarios are possible. As much as financial planners strive to help us avoid such outcomes, when pressed, they will come up with some advice. Accept the disclaimer that everyone interviewed for this article declaimed the premise: with proper advice and planning, it should never come to this. But, we persisted, what if it does?
How do you fix a broken nest egg?
Don’t panic ■ First of all, get an honest assessment, says Brent Davis, financial security adviser with Freedom 55 Financial. When the 2008 collapse happened, some people lost 40 per cent of their assets’ value. But those assets are only lost for good if you sell low.
“One of the things that a lot of people do is they panic,” Davis says. “It doesn’t matter that you’re down 40 per cent because, you know, more times than not, the market’s going to rebound. It’s just a matter of how long it’s going to take.”
Even if the rebound takes four years and not everything is fully recouped, the ultimate loss still might be much lower than the on-paper 40 per cent it appeared at the market’s ebb.
“The question you always have to ask yourself is, when do you need the money? If you need it tomorrow, you should never have been in a position to lose 40 per cent of it,” he says.
If a major loss of income or assets is unavoidable, though, there are some things that can be done. We just won’t want to hear them.
Lowering expectations is key.
Stav Adler is a portfolio manager and retirement analyst at PI Financial Corp., and a member of the Canadian Investor Protection Fund.
“Once adversity strikes, you can’t create value out of nothingness,” he says. “Once you’ve assessed where you stand today, planning for the future requires assessing three fundamental risks: investment risk, inflation risk and longevity risk. Investments could lose value, prices could go up and you could outlive your savings.”
It’s not something Adler recommends to people in good financial shape, but an annuity can be the answer for people who hit a financial crisis.
“What an annuity does is it buys an income stream,” he says. Usually purchased from an insurance company, the income can be monthly or quarterly, for the rest of the person’s life, adjusted for inflation. “So what that investor has done is exported that risk to the insurance company. They get steady income for the rest of their life. The downside, of course, is you don’t have that money anymore. You could get hit by a bus the next day, they keep that money. It’s not yours anymore.”
Postponing retirement is another obvious, if unwelcome, possibility.
Someone’s plan for retiring at 60 may be suddenly unsustainable. “But if they work for another two years, they could put themselves in the green zone. By having that information, they can make a more informed decision.”
Trim expenses ■ Looking at your lifestyle is an unavoidable necessity.
“At a certain point, there is a basic minimum that everybody must have and then, beyond that, there is what people want,” says Adler. Cutting out frills – and many people mistake frills for necessities – is another unwelcome necessity.
Downsizing – reducing accommodation expenses or gaining access to home equity – can be an important step.
Keith Wood, a certified financial planner with Envision Financial, a division of First West Credit Union, knows of a widow in her 50s who was left with no insurance and discovered her husband’s self-employment records in a mess, with Canada Revenue Agency on their tail and a mortgage to boot.
“Fortunately, she had assets in the house,” Wood says. “For her, retirement’s all of a sudden changed.” She’s selling the house and reframing what the rest of her life will look like.
Wood warns everyone – people facing sudden crises and anyone making plans – not to overextend. If getting into a townhouse will leave little or no cushion for saving or a special assessment, consider a condo instead. When it comes to downsizing, he adds, that can involve geographical options. Some people are planning to relocate late in life to the Okanagan or Vancouver Island, where their Lower Mainland home equity will go further.
The most important thing in a time of change is to face up to what’s happening.
“If you’ve had a life-altering change, you really need to sit down and look at all the options,” Wood says. “If you procrastinate, it just gets worse and worse.”
