Insights & Resources

Transitioning from work to retirement can be tricky, especially when it comes to managing investments.

Many of our clients who are in their late working years often ask: “Should I move my investments assets into a very conservative portfolio before I retire?”

This was the case for our client, Matthew, with whom we had recently started working on a financial retirement plan.

Throughout his working career, Matthew had built up a healthy nest egg, having maxed out this TFSA every year and making regular RRSP contributions. At the time, he was 60 years old and planning to retire in 5 years.

Diligent with his TFSA and RRSP investments, he held a balanced portfolio of 70% equities and 30% fixed income. With safety of principle in mind and his retirement fast approaching in five years, he grappled with the decision to allocate 100% of his portfolio to fixed income investments.

Retirement Planning Considerations

Anxious about his retirement, he was concerned if moving his portfolio to 100% fixed income would be the right decision or if there was room in his portfolio for stocks.

Generally speaking, stocks provide the potential for growth in a portfolio; while bonds tend to be the more conservative investment. In some economic cycles, bonds would act to protect against losses on the downside in a portfolio mix of stocks and bonds.

Given Matthew was about to enter retirement and would no longer be earning employment income, it was a natural thought that he would want to de-risk his portfolio.

We had been working on a financial retirement plan for him so we had a pretty good sense of how much he would be spending each year in retirement and what rate of return he would need to achieve to be able to support his lifestyle.

It turns out Matthew would probably need to earn about 4-5% after inflation in order to sustain his current lifestyle and have a bit of a buffer.

While it’s hard to predict the future, it seems that Matthew would need to continue to get growth out of his portfolio to meet his retirement goals. This meant that he couldn’t depend on the lower return rates which are to be expected with bonds.

Understanding the Problem

Matthew wasn’t sure what to do. He realized that he would still need to get growth out of his portfolio, but this level of growth may not be achievable with an entirely Fixed Income portfolio.

We reminded Matthew that on the day he retires he won’t be withdrawing his entire portfolio that year.

Rather, we would be drawing a small percentage of his total portfolio each year. This means that some of his funds would not even be touched for potentially 20 + years.

When it comes to investing, we know that our biggest friend is simply time.

Even though Matthew was about to enter retirement, the time horizon for his total portfolio was not just 1 to 2 years, but potentially up to 20 years or more.

We worked with Matthew to show him how we could break his portfolio into segments. How a portion could be used to fund his lifestyle in the first few years of retirement, and a portion could fund him through his 70s and another portion through his 80s. etc. That meant that there were different time horizons for different investments within that same portfolio.

Tailoring the Solution

For the funds that would be needed at age 65, we agreed that we should reduce risk and move those funds into fixed income investments.

If the stock market were to see an extreme level of volatility, the money that he needed in the short term would have been less impacted and he would not find himself in a situation where he is liquidating his stocks when they are down.

For funds that we earmarked for being needed in his 70s, we agreed to keep them invested into stocks as they had a longer time horizon to grow. We would start moving those stocks into fixed income holdings after age 65.

Funds that would be needed in his 80’s, could be moved from stocks to fixed income while he was in his 70s, and so on.

We can help

We work with business professionals, executives, and families to grow and protect their wealth using our Wealth Plan formula. To discuss our approach and if it is the right fit for you, we invite you to schedule a no-obligation discovery consultation.