Wealth Insights - October 2016

Wealth Insights

October 2016

Investing When You're Retired

It's finally time to relax – don't let your investments do the same

Retirement brings fresh challenges for your portfolio. It's less about accumulating assets and more about how to best leverage the nest egg you've worked hard to build. You have to satisfy your income needs while making sure your money lasts as long as you do. That's not simple in the face of persistently low interest rates and volatile financial markets.

The good news is it's a lot easier once you put the right pieces in place, starting with a sound investment plan.

Assessing the big picture

Begin by thinking about your retirement goals. Are you looking forward to stepping up your lifestyle, or will you live modestly so you can leave a generous legacy behind? What about your income sources? Do you have healthy pension income to support you, or does your investment portfolio need to do the heavy lifting?

It's also important to recognize the risks you face as a retiree. Here are just some of the challenges your investment plan has to contend with:

Longevity. According to Statistics Canada, a 65-year-old man in British Columbia today can expect to live to age 84. For a woman, that figure rises to 87. These are just averages. Don't be surprised if you wind up having to fund your retirement for 20 to 30 years, or more.

Inflation. With constant talk of global deflation, it's easy to forget how hazardous inflation can be to your financial health. It won't have to return to the double-digit levels of the early 1980's to hurt. Even a little will nibble away at your capital. Just 3% inflation, Canada's average rate during the past century, will cut your purchasing power in half in less than 25 years.

Volatility. When you are in the accumulation phase of investing and years from retirement, market volatility, while uncomfortable, can be your friend. Market drops give you the opportunity to buy more of an investment at lower prices. But once you're retired and needing to draw on your portfolio, time isn't on your side anymore.

The five years just before and after retirement can be especially tricky for an investment portfolio. Why? It's when a sharp fall in equity markets can leave you with substantially less wealth to stretch over the years and decades of retirement, threatening your goals and putting you at greater risk of running out of money. Worse yet is if you're having to sell investments as they come down in value in order to generate income. The loss of capital can push you into the perilous position of taking excessive risk with your remaining investments in an effort to recover your savings.

Health expenses and surprise costs. One of the few certainties in life is uncertainty. While the right insurance can help you deal with unwelcome surprises, it's also wise to build flexibility into your investment plan to cover such things as rising health costs as you age, helping out family members or unexpected events.

Investing in retirement isn't what it used to be

Unlike previous generations which could rely on high rates on bonds and GICs to carry them through retirement, today's interest rates have made it important for retirees to retain some exposure to equities.

There are two key advantages equities offer when you're retired.

First, the growth potential from holding stocks can go a long way to countering inflation, improving your odds of maintaining enough capital to see you through your golden years.

Then there's dividend income, which, unlike interest from a fixed rate investment, has the upside of being able to grow over time. The yield on the S&P/TSX Composite Index currently sits just below 3% – that's three times higher than the Government of Canada's 10-year bond yield. What's more, if you're investing in a non-registered account, eligible dividend income can qualify for the dividend tax credit which will boost your net returns after-tax.

That said, don't fall into the trap of chasing any investment based on yield alone. A high yield that's outsized in the current market could be a sign of trouble, warning the payout may be unsustainable.

Getting to a sensible asset allocation starts with understanding the kind of investment return you need your portfolio to deliver. If you're topping up your CPP and OAS benefits with a generous company pension plan (especially one indexed to inflation), chances are you won't need much capital or income from your portfolio. That gives you the freedom to position your investments conservatively with a larger weighting in bonds. On the other hand, if living out your retirement dreams hinges on your savings continuing to grow at a robust rate, be prepared to lean more on equities.

As a general rule, you'll want to scale back your exposure to stocks as you grow older in favour of the stability of quality fixed income choices. But regardless of age, don't neglect your risk tolerance. If you stray too far outside your comfort zone, market volatility can cause you to abandon a well thought out plan and put achieving your goals in jeopardy.

Where cash fits

With its paltry returns, it's easy to treat cash as an afterthought in portfolio planning for retirement. That's a mistake. Here's why.

Holding cash in your portfolio, whether it's in the form of investment savings accounts, cashable GICs or short-term bonds, can help shield you from the downside of running into stormy markets just as you're dipping into your capital to fund retirement.

How? Having a cash cushion gives you a ready source of funds to pay your bills. Experts suggest setting aside enough to cover one to two years' worth of expenses. With this strategy you are no longer forced to 'sell low' to generate income, unloading investments caught up in a market correction. Instead, you can give your portfolio the time it needs to recover.

An alternative to having a chunk of your savings sit idly by is to take a 'cover-the-basics' approach. Your goal here is to match spending on necessities, for example food and shelter, with reliable income streams like pensions. If you find you're a little short, you can fill the gap by using some of your retirement savings to purchase the guaranteed income you require through an annuity.

By ensuring your essential costs are taken care of, you can afford to keep less cash on hand and devote more resources to long-term savings, or spend any extra income as you wish.

Watch your withdrawal rate

There are few decisions which can impact the survivability of your retirement nest egg like how quickly you withdraw funds.

For a portfolio holding an equal weighting of stocks and bonds, a long-standing rule-of-thumb is to draw no more than 4% of your savings annually, adjusted for inflation, to ensure you don't outlast your money. However, today's combination of low interest rates, weak economic growth and lengthening life spans makes it risky to trust that assumption. If you're conservative by nature, choose a 3% withdrawal rate as a safer starting point. Note the percentage you withdraw will likely move up and down throughout your retirement as your circumstances change.

Your withdrawal rate also has implications for your asset mix. If you don't need to spend much of your capital each year, perhaps only 1% or 2%, it gives you the freedom to take less risk with your investments. On the other hand, a high withdrawal rate, say 6%, 7% or more, would eat away at your assets more rapidly, leading you to invest more aggressively if you want to sustain your savings.

Anytime you're either selling taxable investments to fund your withdrawals, or taking money from registered plans like your RRSP or RRIF, there are likely to be tax implications. That's why when developing a withdrawal strategy, it pays to work with an advisor who can step in with the proper tools and expertise to help you make the best choices.

Get the right advice

Having enough investment assets in retirement is important but equally as important is putting a planning strategy in place to ensure you are on the right path towards having your desired lifestyle in retirement. Retirement planning is something everyone should consider at any age and at any stage in their career. Your Westminster Savings financial planner has the skills and experience to keep your portfolio performing at its best, so you can get the most out of retirement. Call us at 604-517-0100 or send us your question online and we'll respond to you within one business day.



*The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. Mutual fund, financial planning and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual funds and other securities are not insured nor guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.