Investment Strategy in Retirement

Several years ago, financial media such as CNN Market Watch and the NY Times issued dire warnings of a major market crash when the boomers retire and sell off all their equities.

In fact, just last month Newsmax stridently proclaimed “Baby Boomers will be Drag on Stock Market Rebound.” 

“That is just logical.  The closer you are to retirement, the more risk averse, you tend to be.”

Really?  It doesn’t sound logical to me at all.

In the first place, boomers have a twenty-year generational span and obviously won’t retire all at the same time.

Secondly, it’s irrational to assume you need to sell your entire investment portfolio on the day you retire and put it into ultra-safe cash and bonds.

That being said, should you change your investment strategy when you retire?

Have your goals changed?

You should revisit your financial plan as well as investment strategy when your goals change.  It’s true that retirement is a major life event and you’ll be making withdrawals for your cash flow, but it doesn’t warrant a major investment overhaul in itself.

Significant changes that can affect your financial plans and portfolio going forward are such things as a critical illness or disability in your family, retiring to another country, buying a secondary home, or having financial responsibility for another family member.

Consider your present circumstances and future goals.  Your investments should provide for your changing needs.

Should you take less risk?

Conventional advice states that as you approach retirement age you should shift more of your equity funds to less risky investments such as bonds.  You need to focus on income and your investments should be liquid and conservative in order to protect the money you’ve accumulated and because you have less time to recover from market losses.

This is the basis of “target-date” retirement funds you may have had through your company pension plan.

A rule of thumb says the percentage of equities in your portfolio should equal 100 or 110 minus your age.  This means someone turning 70 would have just 30 to 40 percent invested in stocks. Their investing time frame is no longer considered long-term.

Yet, in investing parlance, a long-term investment horizon is considered ten years or more. 

Longevity risk is very real and there’s a good chance your nest egg will need to last 20 or 30 years or more of retirement. That seems pretty long-term to me and plenty of time for recovery.

Important factors to consider here are the sources of your retirement income and the flexibility of your budget.

Plan your withdrawals

Once you’ve set a realistic budget you can plan your withdrawals. 

You can’t control what the investment returns will be in your portfolio, but you can control how and from which asset class you take the withdrawal.  You don’t want to be forced to withdraw money from a losing part of your portfolio.

Think in terms of buckets.  Put three-to five-years worth of expenses in shorter term savings instruments like cash, GICs and money market funds.  Keep the rest of your nest egg invested for the long term in order to grow and keep inflation at bay.  Add to your cash position with dividends and profits from the growth of your portfolio.

Since you’re only withdrawing a small portion of your portfolio each year you can still keep a long-term view in mind when it comes to the stock market and still keep your stock allocation relatively high.

Remember also to keep enough cash for anticipated expenses such as a luxury vacation, new car or health care costs.

RELATED:  Protecting your retirement nest egg

The bottom line

Your financial plan should change over time.  However, if you’ve selected a good long-term investing plan up to retirement, there’s really no need for a major investment overhaul unless there are compelling reasons to change.

Mandatory withdrawals from retirement funds will not cause boomers to “take down” the stock market in the coming years.  Future returns could be lower, but it will be from any number of unforeseeable reasons.

And remember, withdrawals don’t necessarily mean spending money.  It can be tucked away in your TFSA or non-registered accounts, or even fund your grandchildren’s RESPs.

Did you/will you change your investment strategy in retirement?

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4 Responses

  1. Phyllis says:

    Thank you for this article. I find it reassuring.

    • Marie Engen says:

      Thank you Phyllis. As I recall you made a big switch in order to lower the fees you’d been paying on your investments. Is that still working well for you?

      • Phyllis says:

        Yes, we switched from high fee mutual funds to a simple three ETF portfolio. We just contributed again and rebalanced for the second time . We’re old pros now! I want to encourage others by saying that if I can learn this stuff, anybody can. It was truly a hassle opening accounts with BMO InvestorLine but we have found it very easy to use since then. We have not contributed to a TFSA so I was thinking of opening an account with Questrade. I want to make monthly contributions and they don’t charge to purchase shares so that might be a good option. I wondered if the new one-fund solutions from Vanguard or iShares would be suitable for the TFSA. That seems so simple!

        • Marie Engen says:

          That’s great Phyllis. Thanks for sharing your experience. I like the all-in-one funds. Easy to contribute to and no rebalancing needed. If you’re planning to make regular TFSA contributions. Questrade is a good service to use with their no fee ETF purchases.

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