Q. I retired in 2008, just in time for the market crash. Fortunately, I did not need my invested money right away. But now, 10 years later, I have begun taking money out for living expenses—just in time for the February downturn. I sat tight the first time and things gradually got better, but I can’t now. What should I do?
A. First off, Jane, you deserve a lot of credit for the discipline you showed in 2008. A lot of new retirees panicked during that devastating crisis. It was hard to blame them, but anyone who sold their investments paid dearly by locking in their losses and missing the swift recovery that followed. You’re probably in good shape now because you stuck to your long-term investment plan.
Now that you’re getting ready to draw down your portfolio, however, I worry that you may not have the right plan for this stage of your life. You’re correct that you don’t have the option of stopping your withdrawals during a downturn. But with a good plan, you won’t have to.
Once you’re relying on your portfolio for cash flow, a portion of it should be in safe, stable investments so you don’t have to be concerned about every dip in the stock market. Here’s a simplified example to illustrate.
Let’s say your nest egg is $500,000 and you plan to draw $2,000 a month to meet your living expenses. And let’s also assume you’re comfortable with a balanced asset allocation of 50% stocks and 50% fixed income. Start by keeping $250,000 in a diversified mix of equity ETFs covering the Canadian and global markets. That’s the part of the portfolio designed to deliver long-term growth, but it’s not there to supply you with monthly income. The cash flow to meet your spending needs will come from the $250,000 in the fixed income part.
To set this up, remember that you need $2,000 a month, so you could start be keeping a year’s worth of cash flow ($24,000) in a savings account. Then you could build a ladder of GICs, with $24,000 in each maturity from one to five years. Now you can ignore the financial news because you have at least six years of income guaranteed. That’s plenty of time to ride out even a deep, prolonged bear market.
Your cash and GICs total $144,000, so you still have another $106,000 to complete the fixed income portion of your portfolio. You can keep that money in a low-cost bond ETF. Unlike GICs, a bond ETF is fully liquid (you can sell it anytime), so this adds some flexibility you’ll need when it’s time to rebalance the portfolio.
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Once a year you’ll need to do a little maintenance: one of your GICs will mature, and you can use the proceeds to top up your savings account and provide the next year’s cash flow. Then you can sell about $24,000 of your equity and/or bond ETFs and use the cash to buy a new five-year GIC to renew your ladder.
Whether you sell stocks or bonds to do this depends on how the markets behaved over the previous year: if equities went up, you’d trim your holdings back to your 50% target. If they went down, you’d sell some of your bond ETF to top them up. With a few easy transactions, your portfolio will be rebalanced and you’ll be all set to enjoy another year of uninterrupted retirement income.
By managing your portfolio this way, you ensure that you’re insulated from short-term moves in the equity market, and that’s essential for you now, Jane. Modest corrections like we saw this past February are going to happen many times during your retirement, and you don’t want to be worrying about every one of them.
For more details, see A better way to generate retirement income.
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