Derek, how should I invest during my retirement?
There is a traditional belief that investors suddenly move all their money out of the market the day they retire and invest exclusively in guaranteed investment products. While this may be a valid investment strategy during retirement, it may not be suitable for all investors. What really should determine your investment strategy should do more with your risk tolerance and your retirement income needs.
I’m a big believer that investors need to consider creating a proper financial plan prior to retiring. This financial plan should consider all aspects of your financial well-being including how you’re investing, how much money you’ll need in retirement, what your final estate looks like, and finer aspects like tax efficiencies and how you wish to distribute your estate. This financial plan should be conservative by design to ensure that it can weather even the worst market conditions and consider inflation and taxes.
The point of the financial plan is to give you some insight into how much you can spend in retirement, but also it should provide you some expectations for what you investments need to earn in retirement. For example, if your plan succeeds while using a low rate of return you may not need to invest aggressively at all. Said another way, if a 3% rate of return means you can meet all your retirement objectives then perhaps you can avoid having any substantial assets in risky investment.
For most investors, a reasonable rate of return will be required to meet their income goals in retirement. This also means that the financial plan should indicate the absolute minimum rate of return that an investor needs. Often investors go into retirement holding far too much cash that is earning next to no interest which can cause major issues in their future cash flow. The reality is that investing too conservatively in retirement can deplete your investments too quickly leading to shortfalls later in life.
One of the biggest risks that investors face is outliving their money during retirement. This can lead to having to sell assets that you wanted to pass to the next generation, relying or family, or notable lifestyle changes. While we can’t predict the future, a proper investment strategy may help mitigate these later in life changes.
Once an investor establishes the minimum rate of return required to meet their retirement goal, a wealth advisor can create a portfolio that is aligned to the unique needs of that goal. This portfolio can include an allocation to income producing securities such as dividend paying stocks, bonds, annuities, among others. Special attention will be required to ensure that no one asset is exposing the portfolio to substantial risk. The point being that while not all securities will move in the same direction, none of them should burden the portfolio heavily if times get tough.
Finally, just because you’re retired doesn’t mean you can’t continue to invest the same way you did prior to retirement. Your portfolio in retirement can still be designed according to your risk tolerances. Many seniors invest in full stock portfolios with the expectation that volatility will swing the portfolio in both directions; either good or bad. These investors consider the long-term average rather than the short-term statement shock. A properly diversified portfolio can help soften the blow of any market dip. Regardless, an investor needs to be comfortable with and educated about their asset allocation in retirement.
So before you sail off into retirement and cash out your investments for safer holdings take a hard look at your retirement plan and income needs, consider your tolerance for risk, and speak with a wealth advisor.
This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. Scotia Wealth Management is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.
Derek Fuchs, Senior Wealth Advisor
Scotia Wealth Management – Central Alberta