Financial advice for those on the cusp of retirement
Create a cash buffer, check out annuities and – gulp – consider working longer
By: PAUL BRENT
Date: October 03, 2016
For Canadians on the cusp of retirement, these are troubling times. Ultra-low interest rates make generating safe and secure income a challenge. Pension plans are less generous or non-existent, and the stock market is – well, the stock market.
It’s bad enough that Bank of Canada Governor Stephen Poloz recently put on his financial adviser hat for near-retirees. His advice: Save more, work longer and rebalance your portfolios to find better returns than those super-safe government bonds.
We asked three financial advisers for their recommendations.
Push back the retirement date
Let’s get the most unpopular option out of the way first. For many would-be retirees, particularly those without plump defined-benefit pension plans, the math just might not work, says Dan Hallett, a vice-president and principal with HighView Financial Group in Oakville, Ont. “Is it a great hardship to delay retirement by a couple of years? Just by that you get a couple extra years of contributions, extra years of growth, hopefully, and fewer years of having to draw down the portfolio.” That time-based trifecta might just make the difference between pain and plenty, he says.
Buy a pension plan
An annuity may make sense, especially for those without an employer pension. Rule changes to actuarial tables – people are living longer than when they were last calculated – will kick in next year, making them less attractive. That has prompted John DeGoey, a portfolio manager with Industrial Alliance Securities in Toronto, to consider them for a minority of his clients. The best candidates? “People who are already retired and people who are healthy as a horse because they are the ones with the greatest longevity risk. They will also get the best rates.”
Do you have a buffer?
If the stock market swan-dives like it did in 2008-2009, recent retirees may be forced to sell stocks at bargain prices unless they have a cash buffer, says Mr. Hallett. “Once you’re at the point of drawing on your portfolio to generate regular cash flow, you don’t have the luxury of leaving the portfolio alone to ride out the bear markets.” He suggests a “bucketing” approach where liquid assets held outside of volatile markets are drawn down rather than stocks. “It does have to be replenished later, but it buys you some time.” That money could be held in a tax-free savings account or money market fund. Mr. Hallett recommends holding at least one year’s worth of cash, three if you are very conservative.
Make dividends your friend
Given low interest rates, consider investing in “dividend paying, sustainable, long-term companies,” says Sterling Rempel, a certified financial planner and founder of Future Values Estate & Financial Planning in Calgary. Yes, you are increasing your equity risk, but the big banks and a select group of other dividend-paying machines are not likely to go under.
Consider emerging debt
“If you want return, who is paying us the most? Emerging markets,” says Mr. DeGoey. His major assumption? “Sovereign debt is sovereign debt and all countries are going to be able to pay their bills for the next generation.”
Old rules do not apply
The old saw that the percentage of fixed income assets in your portfolio should be equal to your age, say 70 per cent for someone 70 years of age, probably does not apply any longer given rock-bottom interest rates, says Mr. Rempel. “You need some sort of strategy for providing an increasing income. By definition, fixed income is fixed, it is not rising. So people need to look at equities or other assets.”
Is it time to be selling?
“With stocks at a relatively high point today, I would be transitioning the asset mix now, even though withdrawals might not start for a year,” says Mr. Hallett. “So close to retirement, your cash flow needs and other income sources [if any] should be well known. And the investor should be clear on what he or she needs the portfolio to provide, in terms of ongoing cash flow.”
What’s your spend rate?
The most expensive years of retirement are generally the first few years, when the long awaited “bucket list” of trips and major purchases are made, says Mr. Rempel. Near-retirement Canadians should examine the costs of those trips, gifts and indulgences to determine whether their investment portfolios can take the strain. If not, pre-retirees should scale back or take some well-intentioned advice from Governor Poloz and push back their retirement calendar.
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