Even for the most cautious retiree, there is no such thing as a risk-free investment strategy.iStockPhoto / Getty Images
No one likes to lose money. But retirees are especially averse to investment losses, since they no longer have a continuing stream of employment earnings.
Take Martha, a 65-year-old who expects to live at least until 94 thanks to good genes and a healthy diet. Apart from Canada Pension Plan and Old Age Security pensions, all her retirement income will have to be generated from her savings. She would like to avoid a capital loss, but how?
Martha considers three asset mixes: 40/60, meaning 40 per cent in stocks (split evenly between U.S. and Canadian ones), and 60 per cent in long-term government bonds; 20/80; and 0/100, meaning everything in bonds. To improve her chances, she keeps her investment fees low, at 0.5 per cent, by investing in exchange-traded funds (ETFs).
Martha’s expected retirement period is 29 years, which is convenient for our analysis since there have been exactly three 29-year periods since 1938 (the first year with good statistics for all asset classes). There is a fair chance the future will resemble at least one of those three periods – we just don’t know which one.
As the chart shows, Martha would have lost money in at least four years out of 29 and as many as eight years. The most benign period investment-wise turned out to be 1996-2024, even though it included the dot-com bubble (which burst in 2000), 9/11 and the Great Recession of 2008-2009.
Regardless of the period, we find that Martha could have minimized the risk of a loss by investing at least some assets in stocks. This may come as a surprise since stocks are traditionally considered riskier than bonds.
The 20/80 asset mix proved to be the safest, and while the 40/60 mix was a little riskier, it did result in a higher average return. Coming in dead last was the strategy of putting 100 per cent in long-term bonds.
If Martha was intent on avoiding a loss under any circumstances, she could have put all her money in a short-term bond fund, a money market fund or GICs. That strategy, however, would have resulted in a lower long-term return than any of the three asset mixes analyzed above.
The moral here? Even the most risk-averse retiree needs to accept a little investment risk.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca).
