How To Prepare For A Market Downturn

Are you confident about your retirement prospects, or does a review of your savings leave you feeling anxious? According to a survey conducted for CTV news, only 5% of Canadians feel they have more than enough money to carry them through retirement, and as a result, 4 in 10 Canadians are quite worried about their financial future.1

Many Canadians believe the magic retirement amount they need is $756,000, but on average they only have $184,000 put aside for their golden years.2 Thankfully, regardless of how much you have built up in your nest egg, it’s not too late to bulk up your savings and catch up for retirement in a hurry. Here are six steps you can take today.

1. Boost Your Savings Rate
The most obvious step to take is to save more. Cut back on expenses, channel a healthy percentage of any raises and bonuses directly to savings, and automate savings increases of 1% of your paycheck every few months. It may not seem like you are making much of an impact, but every dollar helps.

Your increased savings can be invested in your Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). With a TFSA, you can contribute $5,500 a year, but you have something called contribution room. In other words, if you’ve never opened a TFSA before, you can contribute up to $57,500 today: $5,000 for each year from 2009 to 2012; $5,500 for each year for 2013 and 2014; $10,000 for 2015 and $5,500 for each year for 2016, 2017, and 2018.3 Both (RRSP and TFSA) are ideal for catching up for retirement because If you can’t make your full contribution one year, you can make up the contribution in later years.

2. Invest For Growth
Your goal retirement date doesn’t have to dictate your investment time horizon. You may be retiring in 10 years, but you don’t need to set a 10-year horizon for your investments, because you’ll only need a small portion of your nest egg in the early years. The rest of your money may stay invested for another 20 to 40 years. Make sure you invest with the right perspective so you can achieve as much growth as possible.

One thing to remember, though, is not to try to chase unreasonable returns as a way to make up for a lack of retirement savings. With the proper asset allocation, your portfolio can see healthy growth without questionable, high-risk investments. High-risk investments aren’t worth the risk of losing half your money when the next market correction strikes.

3. Review Your Insurance Coverage
Insurance is one of those things that most people purchase and then forget about. It would be worthwhile to review all of your insurance policies to ensure that you actually need the coverage you have. Your needs may have changed dramatically since you had a young family, and there is no point in paying for something you no longer need.

Also, you should make sure that you have long-term care insurance in place once you are over age 60. Nothing drains a nest egg faster than living in a nursing home and paying out of pocket.

According to a study conducted on behalf of the Canadian Health and Life Insurance Association, 74% of Canadians do not have a plan to pay for long-term care,4 and 52% would not be able to afford long-term care if they were to need it right away,5 so it is important to consider how long-term care will affect your overall retirement plan.

4. Pay Off Consumer Debt
The less debt you have when you enter retirement, the better. Reducing your consumer debt before retiring helps you lower your monthly expenses and enables your savings to grow and last longer.

Review all current debts you face and compare interest rates and balances. This can help you decide which to pay off first. Once you’ve eliminated credit card and auto debt, see how you can aggressively pay off your mortgage. Not having a mortgage could reduce your monthly expenses by up to a third and make a significant impact on how you spend your savings.

5. Downsize Your Home
As you near retirement, your housing needs will be different than they were when you were raising a family. Many people downsize their homes prior to retirement as a way to reduce or eliminate debt and reduce utility expenses. In addition to the financial benefits of downsizing, a smaller home and yard require less work and cleaning, and a one-story home could be much more practical as you age.

6. Put In A Few Extra Years Of Work
There are multiple benefits to delaying retirement or continuing to work part-time during retirement. Here are some of the top reasons to work longer.