What if the stock market busts just as you retire?

A stock market correction is the parting gift from hell if you’re about to retire from your job.

You put money away diligently for decades, only to have stocks plunge just as you’re about to leave the work force and start drawing on your savings. After the rottenest month we’ve seen in ages for stocks, anyone with a retirement date in late 2018 or early 2019 has to be worried about what’s to come.

There are ways to arrange your retirement investments so they withstand stock market corrections – declines of 10 per cent or more – such as the one we’re seeing right now. But let’s acknowledge that there is no perfect way to cut the anxiety of seeing your wealth shrink on paper. Where there’s exposure to stocks, there’s investing stress from time to time.

A quick word about the temptation to opt out of market turbulence by selling your stocks: Don’t. You may avoid further losses, but what if stocks rally? Think how frustrating it would be to miss out. And if the correction worsens and turns into a crash, your satisfaction will turn to stress as you try to move back into stocks to capture the next wave higher.

“You often miss the recovery, which can happen so fast,” said Graeme Egan, president of CastleBay Wealth Management in Vancouver and both a portfolio manager and certified financial planner (CFP). “And then you’re second-guessing yourself each day: Should I get in? Should I get in? Emotion takes over – emotion, greed, all that stuff.”

Readying a retirement portfolio for a correction is a matter of diversification. “As they get closer to retirement, people should be ensuring that their asset mix is appropriate for where they are at,” said Jane Bolstad, a Calgary-based CFP, via e-mail. “I often see people who are a year or two from retirement and still 80 to 90 per cent equities. Very often, it’s because they (or their advisers) haven’t been monitoring this.”

Having almost all your portfolio in stocks at retirement is risky. Mr. Egan said a new retiree with his firm would have roughly 40-per-cent stocks and 60-per-cent bonds. If a client has a defined benefit pension plan (the kind that pays a preset amount for life), he might flip that mix to 60-per-cent stocks and 40-per-cent bonds.

Over the decades you save for retirement, stocks provide most of the growth. A lot of people continue to need some of that growth in retirement because we’re simply living longer. Mr. Egan uses a projected lifespan of 95 years for clients. The long-term growth of stocks also helps offset inflation, which has gained some momentum over the past 12 months.

Some investors are nervous about bonds these days because of rising interest rates, which push the price of bonds and bond funds lower. But while the S&P/TSX composite index fell sharply in October, the FTSE TMX Canada Universe Bond Index held its ground.

Mr. Egan is dealing with the risk of higher rates by using short-term bond exchange-traded funds, which are less vulnerable to rate hikes than bonds with longer terms. He’s also using a 50-50 split of government and corporate bonds. Government bonds excel at providing a safe haven, while corporate bonds are somewhat less vulnerable to rising rates.

Ms. Bolstad recommends that someone approaching retirement in a year’s time calculate the amount of dividend and interest income their portfolio will generate each year, then compare that with their cash needs in retirement. If the income is sufficient, they can leave their portfolio alone after a correction so the stocks and equity funds recover.

Retirees who will draw some of their capital as well as income should consider having some of their portfolio in cash or cash equivalents such as an investment savings account. Available from several mutual fund providers and the ETF company Purpose Investments, these accounts pay interest at rates between 1 per cent and 2 per cent and are unaffected by stock market declines.

Ms. Bolstad said a new retiree could dip into these safe holdings if stocks fall hard. “This strategy usually helps to manage emotions as people realize that they won’t have to sell any investments during the crash period and their portfolio will have a chance to recover before they do so.”