Money is a vital necessity of life on this earth.
We spend most of our lives trying to accumulate it, but when we retire the challenge becomes how to manage what we’ve gathered and create a steady stream of income that will support the way we would like to live.
Two basic principles apply to this challenge. One is to invest in a way to preserve capital but still achieve some growth. The other is to use money in the most tax-effective way possible. When it comes to managing money in retirement, many people take the traditional view that they should invest for security only and not for growth.
“The trouble with that view is that people are living longer these days, so retirement can easily last 20 to 30 years,” said Norman Raschkowan, chief North American investment strategist with Mackenzie Financial.
“Capital has to grow if it is going to be able to maintain a standard of living over time.” Raschkowan says a good rule of thumb when determining how much of your portfolio should be in growth assets is to subtract your age from 100.
In other words, if you’re 70 years old, roughly 30 per cent of your portfolio (100-70=30) should be committed to growth.
With this formula, the growth portion of your portfolio will decline as you get older.
Some other investment-in-retirement considerations include maintaining the purchasing power of your money and managing market volatility.
“Inflation is a silent killer,” said Patricia Lovett-Reid, senior vice-president of TD Waterhouse. “At an average annual inflation rate of two per cent, the purchasing value of $1,000 now will be just $667 in 20 years. It’s also important to manage market volatility and protect the downside risk to avoid the double whammy of withdrawing money from a portfolio to support lifestyle when it is losing money.”
Lovett-Reid suggests that 100 per cent of your basic needs should be covered by guaranteed sources, such as the Canada Pension Plan, old age security, registered pension, annuities, guaranteed investment certificates and government bonds.
Your cash flow requirements for up to five years should be funded through fixed income sources, such as GICs and government and corporate bonds. Equities will make up the portion of your portfolio that you will not require for at least the next five years.
“In deciding your investments, consider liquidity,” Raschkowan suggests. “The less liquid the less risk there is, but you want to have some liquidity in case economic or market circumstances change.”
Lovett-Reid suggests building a portfolio of investment-grade Canadian fixed income and globally diversified dividend-paying stocks.
A low to moderate risk portfolio would consist of: a maximum of 25 to 50 per cent in equities, with some exposure to preferred shares, as they are very tax efficient and rank higher in security than most equities; 30 to 40 per cent in corporate bond funds; and the balance in government bonds, GICs and money market funds.
“More aggressive investors can add a little more zip to their portfolio, with 50 to 60 per cent equities and some exposure to commodities, specific sectors and countries,” said Lovett-Reid.
A diversified equity portfolio would contain some consumer staple, pharmaceutical, utility and low-priced retail stocks, Canadian banks, agricultural, crude oil and metal stocks, as well as companies that are focusing on alternative energy, clean water and smart technologies, or that offer products and services geared to the large baby boom demographic.
“The key is to be able to identify these trends early and invest in the companies that will benefit from them and stay invested while the trends play out,” she said.
Real return bonds are another attractive investment option because their principal and interest are adjusted for inflation and can offer some protection against unanticipated jumps in inflation.
“They are one of the few investment options that provide guaranteed sources of income protection,” said Raschkown. “It’s important to remember when investing in retirement to continue to have diversity and liquidity in your portfolio.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.