Retirementunknown
Bev and Adam are prodigious savers. They've stashed away $75,000 a year from their combined $150,000 before-tax income for enough years that their retirement nest egg now stands at $1.6-million.
The key is that they live modestly.
He is 51, she is 50. Neither has a company pension. They plan to at least semi-retire next year and wonder how to ensure their savings are enough to span 40-plus years of retirement. They were rattled by the stock market collapse in late 2008.
"I used to say I could stomach a 20-per-cent drop in the market," Adam writes in an e-mail, "but that was when we had less than $100,000 invested. Now that we have $1.6-million, a 20-per-cent swing is a life-impacting amount."
Since the market drop, Adam says he has been buying guaranteed investment certificates yielding 3 per cent so he and Bev don't lose any more money. Only a small proportion of their holdings is in stocks, mainly banks and pipelines. They also have some preferred shares, government bonds, "and a large portion in money markets that is earning virtually nothing," he says.
"Our challenge is how to invest in this environment and still be able to fund our retirement."
We asked Gordon Stockman of Efficient Wealth Management Inc. in Port Credit to look at Adam and Bev's situation.
What the Expert Says
If this couple can continue to live modestly, getting by on an after-tax income of $42,000 a year, as they say they can, they could leave their money in GICs if they wanted to, Mr. Stockman says. "They need take no risk whatsoever."
They have more than $1-million in registered retirement savings, about half a million in non-registered assets, $10,000 in tax-free savings accounts, $30,000 of cash surrender value in a life insurance policy and a home valued at $250,000. They have no children.
As for their portfolio, they have 12.4 per cent of their holdings in stocks, 33.6 per cent in bonds, 35 per cent in GICs and 19 per cent in cash and money market securities.
Still, their holdings are not as risk-free as they may appear at first glance.
"The existing portfolio contains many great selections," Mr. Stockman observes. "It is highly liquid, the bonds are spread out over different maturities, GICs and strip bonds are utilized in the short term, and most stocks selected are dividend paying, spread out among financials, energy and utilities."
What comes to mind, he says, is the couple has "too much of a good thing." Each asset category is "overused" to the exclusion of alternatives that would provide better protection against interest rate volatility and inflation. Over a 40-year time horizon, inflation could seriously erode the purchasing power of a portfolio invested mainly in GICs and money market securities.
According to Mr. Stockman's plan, Adam and Bev would draw on their non-registered holdings first to defer income taxes. So their spending needs for the first several years of their retirement would come from their short-term, liquid investments: cash equivalents, five-year GICs and laddered strip bonds.
That way, "their longer-term investments will have lots of time before harvesting to provide income in year seven and beyond."
As it stands, they have about $561,600 in the short-term, liquid category, far more than the $210,000 he estimates they would need during the first few years of retirement. He advises putting the extra money to work longer term.
This should not be done all at once, he cautions. Rather, Bev and Adam should use some of their cash hoard to buy longer-term securities when prices have been beaten down.
"In truth, we would not expect to see this implementation in under three years," Mr. Stockman says. "We believe you should be opportunistic when changing course like this."
Looking at the stock portion of the portfolio, Mr. Stockman sees imbalances there, too. Shares in a big Canadian bank account for half of the total equity position. This holding should be trimmed substantially because not doing so "unwinds the hoped-for diversification provided by the other 10 holdings."
The entire portfolio is invested in Canadian securities, a market dominated by natural resources and financial institutions. He suggests diversifying the equity component among Canadian, U.S. and international markets, using exchange-traded funds for areas "where they lack expertise or experience."
Virtually all of the longer-term bonds are Canadian dollar securities issued by governments in Canada. Adding some corporate bonds would reduce the interest-rate sensitivity, the planner says, while adding some U.S. and international bonds would give greater diversification.
Each year, Adam and Bev should rebalance their holdings. They should move $10,000 from their non-registered holdings into tax-free savings accounts each year until their non-registered holdings are exhausted.
Once the new portfolio is in place, it would have 13 per cent Canadian equities, 13 per cent U.S. equities, 9 per cent international equities, 28.8 per cent domestic bonds, including real return bonds, 9.6 per cent U.S. dollar bonds, 9.6 per cent international bonds, 13 per cent GICs and other liquid investments and 4 per cent cash and money market securities.