October 15, 2013
By Clément Gignac
Anyone with a defined benefit pension plan has a decided advantage when it comes to retirement planning. Having an income cushion throughout your senior years relieves the pressure considerably when facing market upheavals.
In the post-recession days of economic uncertainty, however, the number of people with defined-benefit pension plans is declining. This leaves a growing number of individuals nearing retirement with the job of structuring a financial plan that will carry them through their senior years. [EXPAND Read more]
There are many changes facing potential retirees today that are having a significant impact on their portfolio planning. Life expectancies are longer, and returns on investment much lower than they have been in the past. As people reach the age of 65 and beyond, asset mix becomes a key component of any financial discussion.
We often read and hear about fixed income being the most important asset for retirement planning. That may have worked in the days when investors heading to retirement could comfortably build an entire portfolio around those types of assets. However, at a time when low interest rates are being outpaced by inflation, this one-sided approach will likely not generate enough income to carry you through your retirement. Equities might have to be a larger part of the asset mix.
Those with a defined-benefit pension plan will certainly have more latitude than others, since a secure revenue stream allows you to assume a greater risk profile. Anyone who continues to receive 60% of their annual income throughout their retirement for example, can afford to be more aggressive with their investment choices.
So how do you strike the right balance between equity and fixed-income assets as you age in order to sustain yourself financially throughout your retirement years? There is no one-size-fits-all answer to this question. Much depends on your stage in life, your living and financial situation as well as your risk profile. A 65-year-old renting an apartment for example, will be in a more challenging financial situation than a homeowner sitting on a valuable asset that can be liquidated to generate cash.
Whether one has a defined-benefit pension plan or not, however, caution should always prevail, simply because at 65 you don’t have the same timelines to recover from a market crash as a 35-year-old would. It is also prudent to revise your plans on a regular basis. Even the most conservative of investors should make a point of revisiting their asset mix every five years (or less) to adjust ratios in keeping with their stage in life. Over time it is likely they will lean more heavily toward bonds, GICs and treasury bills, and reduce their equity holdings.
As investors continue to face a low-interest-rate environment, it may be necessary to stay a bit longer in the equity market than in the past to generate acceptable returns. Whatever the choice, the time is now to sit down with a financial advisor and get a true picture of an asset mix that works best for your situation. [/EXPAND]