Maintain Asset Allocation When Withdrawing Retirement Funds
Your original target asset allocation was the most important decision when it came to building your retirement portfolio. You may have adjusted that allocation to be more conservative when you retired.
As well, retirees are likely to have multiple retirement accounts. Many of us may have some combination of RRSPs, RRIFs, Locked-in Accounts, TFSAs, non-registered investments and, if you’re married you double some, or all, of these accounts.
Over time, your investments yield different returns due to changes in market activity and your portfolio drifts out of alignment, especially once you start withdrawing your retirement income.
If you don’t rebalance, you’ll be exposing yourself to risks that might not be compatible with your goals.
Consolidate to simplify
First of all, I would try to consolidate accounts held at different institutions into your favourite financial institution. Over the years banks and credit unions had promotional interest rates or other special feature during RRSP season and you may have taken advantage of these offers resulting in accounts all over the place.
Keeping all your accounts together simplifies things a lot, but balance simplicity with any costs you may incur. Some things to keep in mind:
- GICs must have matured.
- Proprietary mutual funds such as those held with Investors Group or Manulife can’t be transferred in kind. They will have to be converted to cash.
- If you sell any funds or stocks in a non-registered account before transfer, you may have taxable capital gains.
Also, check your accounts for multiple investments of the same kind. If you reduce the number of holding you have your withdrawals will be more streamlined.
Market activity plus withdrawals from your accounts for your retirement cash flow will result in your funds drifting away from their initial asset allocation. Now your need a rebalancing strategy to get your portfolio back into alignment.
Some investors like to rebalance according to a calendar date, making monthly, quarterly, or annual adjustments. This works particularly well when you coincide rebalancing with your withdrawals. Rebalance by withdrawing profits from the asset class that has increased and adding to the one that has declined, if necessary.
Others prefer to rebalance whenever an investment exceeds – or drops below – a specific threshold, say if a fund dips below 10 percent, or rises above 20 percent of the portfolio’s overall asset allocation. Don’t overdo it though. You can’t reasonably expect to keep your portfolio in exact alignment with your target all the time. Rebalancing too often increases your costs.
Rebalancing multiple accounts
Rebalancing is easy enough when you only have one or two accounts. But if you’re juggling half a dozen or more it can be trickier.
You’ll be using your RRSP/RRIFs, Locked-in Accounts and maybe your TFSA for retirement income. So, it’s best to think of all your retirement accounts as a single portfolio.
Here’s an example of how this might look with a value of $500,000 with a common 60% equity/40% bond asset allocation:
As you can see, the overall portfolio includes the desired asset allocation, but no individual account has that composition. This strategy obviously can result in different returns in each separate account, but you need to look at the big picture.
If you keep the number of individual holdings to a minimum, it reduces trading costs and can make your portfolio more tax efficient.
The bottom line
Rebalancing your portfolio reduces your risk exposure and increases the likelihood of achieving your desired long-term investment returns even while making necessary withdrawals.
A rebalancing strategy forces you to buy low (the lagging fund) and sell high (your profits).
All of your retirement accounts need to be working together and working towards the goals you have set.