Getting them back to balanced

John and Kirsty Dales are where most Canadians wish they could be: mortgage-free with a good pension and a healthy nest egg to fund their retirement. But their ultra-conservative RRSPs could stand in their way.

  3

by

From the Summer 2013 issue of the magazine.

  3

Portfolio_Builder_banner_1256X300[2][2][2]
Dales_322

The problem

John Dales retired from a stressful job at 57 after his wife Kirsty said “she’d rather have me poor than dead.” The good news is the couple is far from poor: they have a paid-for home in Northern Ontario, their children have left the nest, and Kirsty will receive $45,000 a year from her defined-benefit pension when she retires from the public service next May. But their $500,000 RRSPs are very conservatively invested in savings accounts, GICs and bond funds unlikely to deliver more than 2% a year. They plan to spend $60,000 annually in retirement, and they’re not sure such a low-yield portfolio will be able to sustain their lifestyle.

The fix

The challenge for this couple is as much about broad financial planning as investing, so we consulted veteran financial planner Warren Baldwin of Toronto-based T.E. Wealth.

John and Kirsty will each receive reduced Canada Pension Plan benefits at age 60, with full Old Age Security at 65. Their only debts—for a car and a home renovation—will be paid off in two and four years, respectively.

Their government benefits, along with Kirsty’s pension, will go a long way to meeting their retirement spending goal of $60,000 (adjusted for 2% inflation annually). But Baldwin estimates they will need to achieve 5% annual investment returns if they want to make their portfolio last until age 90. Unfortunately, with today’s interest rates they can’t hit that target with their current mix of 90% cash and fixed income. “Their portfolio looks as if it were pulled out of the markets in the last financial crisis and never fully returned,” Baldwin says.

He suggests the couple should shift the portfolio to something more balanced: roughly half stocks and half fixed income (including the addition of corporate bonds) to get closer to the goal of 5% returns with moderate risk.

An all-ETF portfolio provides broad diversification and extremely low costs, T.E. Wealth financial planner Matt Ardrey says. “This will be uncomplicated enough to manage on their own while still providing adequate diversification through asset classes, geographic regions and company size.”

Do you want a portfolio makeover from MoneySense? If so, send an email describing your situation to letters@moneysense.ca
Ask Moneysense About EFTs

3 comments on “Getting them back to balanced

  1. Appreciate the well-intentioned sentiment behind the standard advice to take on "moderate risk" in exchange for a greater return. But this seems like somewhat blind dedication to asset allocation on the usual basis of historical long term average returns, etc. Might produce the desired outcome but there is certainly no guarantee of that. I'm increasingly in the Zvi Bodie, David Trahair, Jim Otar school of thought (crowd yawns). Determine what worst case scenario you're prepared to accept as the cornerstone of your financial plan. If you can't tolerate the idea of a significant portfolio loss, determine if you can still mainatain an acceptable standard of living with less income and plan from there. Indeed, if you can earn 3% on GICs guaranteed, versus 5% with half your money exposed to signifcant risk, then maybe the answer is to figure out ways to reduce spending (or even earn a little part-time income) and go the conservative route. You'll sleep better too.

    Reply

  2. “Their portfolio looks as if it were pulled out of the markets in the last financial crisis and never fully returned,”
    He suggests the couple should shift the portfolio to something more balanced: roughly half stocks and half fixed income (including the addition of corporate bonds)

    — Whoa — compliance red alert!

    Is the recommendation suitable and appropriate given the client's past investment experience?

    Unless I misread this, the big question is: Were these clients in stocks and then exited stocks during the Great Panic of 2008 -2009? And we want to put them back into stocks at a whopping 50% equity exposure ( with markets at record highs) and maybe put them into bonds in a rising interest rate environment?

    I think diversifme is correct. Reduce spending plans and hope and pray interest rates rise with the current portfolio. 90% in cash?! GICs could be a more appropriate investment for this couple.
    Hopefully, minimally, the couple is using a deposit broker to maximize GIC yields Laddering GICs might help here.

    Reply

  3. I quite like the concept of 'lazy rebalancing' – instead of actively rebalancing the portfolio (incurring transaction costs and capital gains/losses), every time you contribute or withdraw from the fund, you do it in a way that moves your overall portfolio closer to the desired level. If you want to be 50/50 bonds and stocks but you hold 60% stocks, rather than selling bonds you can simply make your next contribution to bonds, bringing the portfolio closer to desired. I'm a big fan of buy-and-hold though, so maybe I'm a bit biased

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *