Slice up your RRSP for retirement

With the collapse of the technology bubble in 2000, the recession of 2008 and now the economic recession and European debt crisis, the last decade has had some pretty tough times for investors in general, but particularly those approaching, or in, retirement.

With the collapse of the technology bubble in 2000, the recession of 2008 and now the economic recession and European debt crisis, the last decade has had some pretty tough times for investors in general, but particularly those approaching, or in, retirement.

Last year, the first wave of Canadian baby boomers — an estimated 344,000 of them — turned 65, and for the first time in the country’s history seniors outnumbered children.

The current volatility on global markets and the growing number of people entering retirement requires a new investing mindset and allocation of portfolios if Canadians are going to preserve their wealth through a retirement that now can expect to last 20 to 30 years or even longer.

“The old rule that as you get closer to retirement the more conservative you should become is still true, but there’s also the reality that your post-retirement savings will have to last longer because people are living longer,” says Serge Pepin, head of investments with BMO Investments. “People need to think about the post-retirement phase of their lives. As it becomes longer, it becomes more important and it becomes more crucial to examine your portfolio to see that it meets your needs, aspirations and goals.”

Pepin suggests investors think of their retirement assets as three main slices of a pie with the possibility of a fourth slice, depending on their resources and goals.

The first slice of the pie is your immediate needs — having enough money for housing, food, transportation, health care and other things that make up your daily living. “It’s crucial that people set a budget,” he says. “It needs to be in very secure fixed income investments such as GICs, annuities and bonds. They may be boring but they keep the lights on at night.”

Next is the capital preservation slice of the pie. “Investing to preserve capital is an on-going exercise that can change over time as some costs, such as health care, may rise as you age,” says Pepin, who recommends conservative but growth-bearing investments such as GICs, balanced funds and dividend-paying blue chip equities. “Over time, this slice of the pie will migrate into the first.”

The third piece of the pie is the growth component. “This is where you can be more aggressive for more growth, perhaps with some foreign exposure, but you should still try and be as balanced as possible,” Pepin suggests. “It’s a good idea to sit down with your financial planner at least once a year to review, because your needs may change during the year.”

Vikas Saika, a financial adviser with Edward Jones in Mississauga, believes seniors need to set reasonable expectations for their income and growth on investments.

“When investing there will always be something to get spooked about,” he says. “Daily fluctuations shouldn’t change your overall objectives. In turbulent times like these look for good quality investments that have come down in price. Look for opportunities, reduce exposure to high risk sectors like resources, and focus on dividend paying equities and corporate bonds.”

Laddering is an effective income-generating strategy.

A ladder is created by purchasing bonds of GICs that mature each year over an extended period of time, usually two to 10 years. As each investment at the front end of the ladder matures, the proceeds either can be used for income or reinvested at the back end of the ladder.

Laddering offers the potential for higher yields, reduces risk and improves liquidity because there are always some investments maturing.

The potential fourth slice of the pie is creating a legacy to leave to children, relatives, charities or others.

“If you want to leave a legacy you probably can be a little more aggressive in your investment approach because you have time to regain losses,” says Pepin. “But there’s nothing wrong with being selfish in your older years. Look after yourself first and then, if you can, go for the fourth slice.”

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.

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