Road Cents
By Michael Woods, CFP, CIM
It’s October and Walter and Winnie Bago are finishing up preparations for their 2016/2017 winter voyage to Arizona. During the 2015/2016 winter, there was a lot of volatility in the investing world, and Walter found himself worrying about the retirement income from their portfolio. This winter, Winnie does not want to deal with Walter’s grumbling and has instructed him to make some changes so that he won’t need to worry if the markets follow them south. Walter is wondering what changes he can make to ensure his time away is worry-free regardless of what the markets do.
In the current low-interest-rate environment, many investors are seeking additional income from dividend-paying stocks because their bonds and GICs don’t pay enough. It is this exposure to stocks that caused Walter’s frustrations last year, but he understands the role equities play and does not want to sell them. At the same time, he doesn’t want to be a forced seller at a low price if he needs the capital to fund his lifestyle.
Walter and Winnie’s problem is a common one for retired investors and can be mitigated through appropriate asset allocation. In order to reduce stress during volatile markets, Walter and Winnie should ensure they have one or two years’ worth of income needs in cash or cash-like investments such as cashable GICs and term deposits. Furthermore, they should ensure they have three to five years’ worth of income needs in longer-dated fixed income securities such as corporate bonds, GICs or government-issued securities. They could then use the dividends and realized capital gains from their equity investments to top up their cash balance as they draw it down.
Each investor is different and has their own risk tolerance, so adjustments can be made to the allocation to suit comfort levels. For instance, a more conservative investor may be better suited to having five years of income needs in cash-like investments and another five to 10 years of needs in fixed income. On the other hand, an aggressive investor could be happy with one year of cash needs in liquid securities and two or three years in fixed income.
By focusing on asset allocation, investors can take comfort in knowing where their cash needs will come from, allowing them to ride out whatever storm the equity markets may encounter. The fastest way to deplete the capital of your retirement portfolio is to sell in a down market to fund your lifestyle, and asset allocation reduces the likelihood of this action. By properly constructing their portfolio now, and making adjustments as markets and needs dictate, Walter and Winnie can ensure that this winter they worry less about their finances and more about kids in the pool during adult hour!
Michael Woods is a Portfolio Manager At Odlum Brown Limited.
The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. Many factors unknown to Odlum Brown Limited may affect the applicability of any matter discussed herein to your particular circumstances. You should consult directly with your financial advisor before acting on any matter discussed herein. Individual situations may vary. Member-Canadian Investor Protection Fund.