Investment strategies for retirement

The Vancouver Sun
By Clay Gillespie

In retirement, you will have a combination of different possible income sources that need to be integrated. You’re probably entitled to some type of government benefit like OAS or CPP. As well, you may have a company pension plan, as well as your own personal savings such as a RRSPs or non-registered assets. [EXPAND Read more]

CPP and OAS income benefits are quite valuable as they do not fluctuate with the stock market and are indexed to inflation. Many defined-benefit company pension plans (a pension in which the retirement income benefit is calculated based upon years of service and salary level) are not indexed to inflation and therefore each year they will buy less and less as the cost of living increases. A defined contribution plan is a plan where both employees and employers contribute to an invested pot of money whose value will fluctuate with current market conditions. At your retirement this sum of money will be used to generate a retirement income. Most personal savings such as RRSPs, TFSAs or other non-registered assets will also fluctuate with current market conditions.

In today’s environment you will receive low interest rates on GICs and bonds and/or you will deal with the stock market volatility when investing and dealing with your retirement savings.

Most Canadians will need to use all or most of their investment assets to maintain their current lifestyle throughout their retirement years.

I always tell my clients that over a typical 10-year period based on investment returns — you’re going to love us twice, hate us twice, and be indifferent to us six times. What this actually means is that over a 10-year period the market typically goes up dramatically twice (the years you love us), goes down dramatically twice (the years you hate us) and six of the 10 times you get an average return and that’s when you think we are doing an “OK” job. Thus, you need to have a strategy to deal with typically widely varying year-by-year investment results.

In a properly diversified portfolio you should be able to minimize the risk of stock market volatility while you are accumulating assets, but this diversification strategy may not be enough to minimize the risk once you start generating retirement income from these accumulated savings.

One of the major issues about generating income from a diversified portfolio is that you will, from time to time, be taking an income from your portfolio in years when the stock market is performing badly — thus depleting your capital (often at an alarming rate), or else you will be forced to reduce your income to maintain your capital.

Thus, you need to design a tailor-made investment strategy that will allow you to generate an income through your retirement years, whatever the state of the market in any one year. In generating an income during retirement, it is important to not withdraw funds from an asset class that is declining in value.

Thus, I often recommend the following simple but effective strategy: Invest one year’s income in a high-yield savings account that will be used for the first year’s income. Invest one year’s income in a one-year bond or GIC. Invest one year’s income in a two-year bond or GIC. Invest the balance of your investments in a diversified portfolio based on your personal goals and objectives.

The rationale behind this strategy is that the high yield savings account will deplete itself over the first year. After the first year, if the growth part of your portfolio has grown in value then you take the following year’s income from the growth portion (i.e. you use some of the growth part of the account to replenish the high yield savings account). If, however, the stock market performs poorly and the growth account decreases in value, then you use the maturing GIC (maturity value is known) to replenish the high yield savings account. If the GIC is not used for income, it will be reinvested for a guaranteed period of two years.

This strategy only works because you avoid taking income from any part of your portfolio that is declining in value.

Your portfolio should be aligned with your retirement objectives at least five years before your planned retirement date. Thus, five years before retirement you should have at least two to three years’ worth of your desired retirement income in a fixed income vehicle (GIC or bond) that will mature the day you retire.

Consequently, if the stock market is performing poorly (five years before retirement) then you will have at least five years to let the market improve before having to take money from your portfolio to generate income. [/EXPAND]