Do you need to revise your retirement plan?

Given the circumstances, I found that the question was slow to come up. It was finally asked by Sylvain: “I have the impression that nothing works anymore! On the one hand inflation is rising, on the other the portfolio is shrinking. What’s the point of making a retirement plan if it’s meant to be picked up like this? »

Speaking of “recording,” that’s what I made from our readers’ comments. To recap, if you didn’t forecast inflation at 8% and negative yields at 30%, what are you doing with your plan?

Quick answer: no exception!

At least we don’t turn him upside down, as long as he was prepared like everyone else at the start.

planning

What are we talking about ? On the sometimes tortuous path that leads us to death: financial planning. The professional planner evaluates retirement income (hence lifestyle) from available sources: Quebec Pension Plan (QPP), Retirement Benefit (OAS), Employer Plan, Savings, Rent, Real Estate Assets, etc.

Depending on the objective, the advisor recommends a savings target. This also depends on the level of risk that the client is comfortable with. If he fears stock market investing, his expected returns will be lower. So he will have to save more or reduce his ambitions.

Such a plan is therefore based on performance assumptions. It also takes into account the rise in consumer prices. Data is critical to preparing for retirement, as inflation, even at normal levels, has long-term devastating consequences. Here, too, we rely on forecasts.

What are these predictions?

IQPF standards

Financial planners are free to use those they deem appropriate, but deviating too far from the standards set by the Institut Québécois de planification financière (IQPF) is suspect. The quality of work will suffer, as will retirement.

The standards are revised annually according to the economic situation. The last update is from spring.

Here are the projection assumptions on the yield side:

  • Short term : 2.30%
  • Steady income: 2.80%
  • Canadian stocks: 6.30%
  • Foreign stocks (developed countries): 6.60%
  • Emerging Market Equities: 7.70%

On the inflation side, we expect 2.10% per year.

Now the question: is it disconnected from reality?

Long-term projections

We tend to see everything black at the moment, that’s normal. Despite prices that have been rising for several months and have been reduced over five years, the inflation rate is barely above 2.3%. Over ten years, it reached just 1.82%.

It is true that these figures do not take into account the last six months. But in the long term, the effects are calculated in decimal places. The same is true for stock market returns, which despite sharp declines in short periods, always rise over the long term.

So it is with planning, a projection exercise that spans decades.

What if inflation persists for years? It’s unlikely.

“When that happens, all fixed income securities will offer better returns. After a while the actual yield [soit les rendements moins l’inflation] should recover,” explains National Bank actuary Daniel Laverdière, Private Banking 1859. We saw that between 1973 and 1982.

Yes, but the plan?

Even a financial plan is not a frozen photo. It needs to evolve, especially after big events: births, job losses, breakups, deaths. “We also need to provide an alternative pessimistic scenario, a sensitivity test,” advises Daniel Laverdière. How will my retirement be affected if my actual rate of return is 1% below my long-term plan? »

If such a gap causes the project to fail, it may be overambitious.

The context calls for caution

There are households that have been hit hard, no doubt about that. Pensioners who have to deal with a non-indexed pension will be penalized. Even if the adjustments come too late for some people’s tastes, the public plan’s performance will eventually catch up with inflation. As with wages, we can’t expect it to follow in perfect sync.

For a plan to work, you must:

  • If the framework conditions are favorable (low inflation, high yields), we do not deviate too much from the planned budget or at all. We keep the surpluses for the hollow moments.
  • When the wind shifts, we tighten our belts a little, but above all we postpone the big expenses.

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