Given the circumstances, I found that the question was slow in coming. It was finally asked by Sylvain: “I have the impression that nothing works anymore! Inflation rising on one side, the portfolio melting on the other. What’s the point of making a retirement plan if it’s to get picked up like that? »
Speaking of “picking up”, that’s what I made of our reader’s comments. Let’s condense it a bit more: when you haven’t forecast 8% inflation and negative 30% returns, what do you do with your plan?
Quick answer: no exception!
At least we don’t turn him upside down, provided he was prepared like everyone else at the start.
Planning
What are we talking regarding ? On the sometimes winding route that leads us to death: financial planning. The professional planner will assess retirement income (therefore lifestyle) from available sources: Quebec Pension Plan (QPP), Old Age Security (OAS) pension, employer plan, savings, rental, real estate assets, etc.
Depending on the objectives, the advisor will recommend a savings target. This will also depend on the level of risk with which the client is comfortable. If he fears stock market investment, his expected returns will be lower. He will therefore have to save more or reduce his ambitions.
Such a plan, therefore, relies on performance assumptions. It also takes into account the rise in consumer prices. Data is crucial in preparing for retirement, as inflation, even at normal levels, wreaks havoc over the long term. Here too, we rely on forecasts.
What are these predictions?
IQPF standards
Financial planners are free to use those they deem reasonable, but if they deviate too much from the standards established by the Institut québécois de planification financière (IQPF), it is suspicious. The quality of work will suffer, and so will retirement.
The standards are revised each year according to the economic situation. The last update dates back to the spring.
Here are the projection assumptions on the return side:
- Court terme : 2,30 %
- Fixed income: 2,80 %
- Canadian stocks: 6,30 %
- Foreign equities (developed countries): 6,60 %
- Equities from emerging countries: 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, it’s normal. Despite prices that have been soaring for several months, reduced over five years, the inflation rate barely exceeds 2.3%. Over ten years, it barely reached 1.82%.
It is true that these figures do not take into account the last six months. But in the long term, the impact will be calculated in decimals. The same can be said of stock market returns which, despite significant declines over short periods, always end up climbing over a long horizon.
So it is with planning, a projection exercise that spans decades.
What if inflation persists for years? It’s unlikely.
“If that happens, we will see all fixed income securities offer better returns. After a while, the actual yield [soit les rendements moins l’inflation] should recover,” explains actuary Daniel Laverdière of National Bank, Private Banking 1859. That’s what we saw between 1973 and 1982.
Yes, but the plan?
Nor is a financial plan a frozen photograph. It must evolve, particularly following major events: births, job losses, separation, death. “We must also provide for an alternative pessimistic scenario, a sensitivity test, advises Daniel Laverdière. What will be the impact on my retirement if my actual return is 1% below what I had planned for the long term? »
If such a gap derails the project, it may be too ambitious.
The context calls for caution
There are households that take the hit hard, there is no doubt. Retirees who have to deal with a non-indexed pension are penalized. Moreover, although the adjustments come too late for some people’s tastes, public plan benefits will eventually catch up with inflation. Like wages, we can’t expect it to follow in perfect synchronicity.
For a plan to work, you must:
- When the context is favorable (low inflation; high returns), we do not deviate from the planned budget, or not too much. We keep the surpluses for the down times.
- When the wind turns, we tighten our belts a little, but above all we push back the major expenses.
