It wasn’t long ago that turning 60 meant the countdown was on—just five more years of working until you could embrace a new life of leisure. Now, it’s likely you’ll still be going into the office well past 65. According to Statistics Canada, in 2005, less than one in 13 Canadians worked beyond the traditional retirement age. In 2015, that figure was at one in eight.
With more people working later in life, and with an ever-extending lifespan (Canadian life expectancy is now 82 years, up from 75 in 1990) the rules around investing and saving for retirement have started to change. Historically, investors would become more conservative in their asset mix as they aged. By the time 65 would roll around, they’d have a healthy allocation of bonds to better protect the cash they’d need to live on in their golden years.
Now though, with many continuing to earn money for longer, the old “100 minus your age equals what you should have in equities” rule is no longer relevant for many Canadians. “That view is flawed,” says Bob Sewell, president and CEO of Oakville’s Bellwether Investment Management. “There’s a misconception that in retirement your time horizon is short, but it’s still very long.”
Even if you do retire at 65, many advisors caution again significantly increasing your fixed income assets. Why? Because of interest rates. For the last three decades, bond funds did exceptionally well as falling yields caused fixed income prices to rise. With today’s rates at ultra-low levels, bonds are going to lose value as yields begin to climb, says Sewell.
Canadians also have to earn more than inflation, which is trending at about 1.6%, higher than bond yields, or risk having the cost of living exceed their earnings power. This is especially important in retirement. “There’s a real risk around inflation and the impact on savings because you may not have the flexibly of finding other sources of income,” he says.
Still, 60-somethings may need to take a different approach to investing from when they were just starting out in their 30s. Rather than basing asset allocation on age, base it on lifestyle, says Stephanie Douglas, a portfolio manager with Avenue Investment Management. Even if you are working longer, you may be putting in less hours for instance. You’ll also need access to cash to fund travel, golf games and other lifestyle choices that tend to come with age. Or you keep working as though you were still a spry 35-year-old.
If you continue to earn the same living you did in your 60s as you did in your 50s, then less will need to change. If you retire and have fewer dollars coming in though, then you may want to take the bucket approach to investing, says Douglas. She thinks retirees should have seven years’ worth of living expenses set aside in fixed income, which would be used for daily needs, such as groceries and gas. Anything above that should be invested and grown in the stock market. Seven years is ideal according to Douglas because that gives people enough time recover from a stock market decline.
While you should replenish that fixed income bucket with money made in the market after it’s depleted, don’t touch the equity bucket during those seven years. “You need to actually put aside some money so you don’t have to touch the equity bucket,” Douglas says. “You don’t want to worry about that part of the portfolio.”
When it comes to the investments themselves, lower cost exchange-traded funds (ETFs) can be an easy and inexpensive way to stay invested in the market. In theory, your asset allocation doesn’t need to change a whole lot from how you invested in your 50s. A diversified portfolio of Canadian, American and international funds works well in your 60s too.
That said, if cash flow needs change then you may have to adjust, says Sewell. If 5% of your portfolio now needs to be paid out to you every year, then you’ll need to generate a return that’s at least in that range—and that can’t be achieved with fixed income alone.
Consider dividend paying equities, he says, but don’t chase yields, which is something many people have done as bond rates have fallen. Sewell suggests buying stocks or funds that grow dividends on annual basis, versus buying a security with a high, but stagnant payout. “The growth of the dividend will help protect you against inflation over time and it also suggests the company has healthy earnings and cash flow growth.”
Ultimately, you might find that the biggest change in your 60s isn’t to your portfolio itself. Rather, it’s your overall planning needs that may change most. It may seem early to start thinking about what comes next, but prudent 60-somethings will begin to consider estates, executors, trusts and future healthcare needs. “There are a lot more variables to worry about,” says Douglas. “There are lot of little things that can cause a lot of problems and it has nothing to do with the market.”
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