Q: I have $700,000 in retirement savings and a small pension of $1,000 a month and CPP and OAS. How should I invest this to last 30 years? — Ingrid
A: Retirement tends to put a big magnifying glass on your savings. Part of it is that you tend to have more time to focus on your money than you did during your working years. Part of it is that you need to figure out where to draw from—whether it’s which investment or which account—and not just how to invest your savings. And part of it is that you suddenly feel this sense of urgency to make your money last through a combination of restraint and returns.
How you invest your money during retirement doesn’t need to be that much different from during your working years, Ingrid. You’re still best to have an overriding investment strategy that you follow, whatever that happens to be.
Some investors are do-it-yourself investors, using a simple, low-cost ETF approach. Others pick individual stocks with a focus on dividends. Yet others use investment advisors who themselves use a variety of approaches, products, fee arrangements and so on.
Let’s start with some numerical parameters for how to make your savings last. I’ll make some general assumptions, like your CPP and OAS entitlement are at the maximum and that your pension is unindexed. Let’s say inflation is 2% and that your investments earn a flat 5% annually net of fees. I’ll assume that your TFSA is maxed out and the remainder of your investments are split evenly between RRSPs and non-registered accounts. On that basis, using other reasonable assumptions, you can afford to spend about $57,000 per year for 30 years, indexed at 2%.
In real life, it doesn’t work quite this way. You buy new cars and help your kids out and replace your roof. Your investments go up 15% and then down 10% and so on. But at least having some rough parameters enables you to assess your investment strategy.
Is 5% a reasonable investment return assumption going forward? If it’s too high, you need to budget spending less than $57,000 annually to make your savings last. You’ll give up returns and retirement income in order to sleep better at night with less investment risk and volatility.
Is $57,000 too high? That may be more than you’re likely to spend each year. If so, you’ll be drawing down even less on your investment capital and living moreso on your investment income at a 5% average annual return.
You may not truly need so high a rate of return to make your money last. Perhaps you take a more conservative stance.
Or you may still choose to invest more aggressively than you need to because your capital requirements are less and you can withstand the volatility. And you can generate a larger legacy for your beneficiaries.
A retirement plan can help you project income and capital requirements from your portfolio and also the drawdown on various accounts. This may be helpful in determining your asset allocation and cash flow planning.
In your case, I’d be inclined to have a bias towards Canadian stocks in your non-registered account and TFSA and to fixed income and foreign stocks in your RRSP. This will promote tax efficiency.
Whether you buy mutual funds, stock, bonds, ETFs, GICs and so on will depend on your investment strategy. First determine if you’re a passive or active investor. And then are you a do-it-yourself investor or do you need a professional? If you’re hiring a professional, you need to understand the pros and cons of transactional versus discretionary fee-based. And finally, don’t just invest with your bank because that’s where your bank account is. Evaluate the banks and the independents to try to determine who is a better fit for comfort, convenience, cost and quality.
Annuities may someday be a retirement tool for investors who want retirement income certainty. But until interest rates normalize, I think people are on their own to build their own retirement income streams through planning and products.
Planning is crucial. Products are plenty. I wish I had an easy answer for you, Ingrid. But unfortunately there is no magic investment with which to fund your retirement.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.