Five portfolio to-do's for retirees at midyear

It's as good a time as any to check up on asset allocations, mandatory RRIF withdrawals and other retirement income strategies.

Christine Benz 27 July, 2018 | 5:00PM

Managing a portfolio in the years leading up to retirement doesn't require a lot of magic. If you save enough of your salary and invest those savings in even a semi-sane investment mix, you'll have a good shot at amassing enough for a comfortable retirement.

Shepherding a portfolio through retirement, by contrast, is inherently more complicated. You have to make sure that you're not spending more than is prudent and that your investment portfolio appropriately balances safety and growth potential. Ideally, you'd also stay attuned to pulling your withdrawals from the right account types to help keep your taxes down. And those are just the headline jobs: You also have to think about required minimum withdrawals from registered accounts, estate planning, your CPP strategy and how you'll shoulder long-term care costs if they arise. That's a lot.

For those reasons, portfolio checkups for retirees necessarily should be a little different--and more in-depth--than a portfolio review that an accumulator might undertake. If you're a retiree checking up on your portfolio after 2018's volatile first six months, here are the key items to have on your dashboard.

1. Check your year-to-date spending rate.

If you're looking for a single number to help you gauge whether your retirement plan is on track and sustainable, your withdrawal rate is a good place to start. Calculate your withdrawal rate by dividing the total amount you expect to spend this year by your portfolio's balance. Be sure to take tax effects into account; for example, if you're spending $70,000 each year and need to pull $85,000 from your RRIF each year to arrive at your target amount after taxes, your withdrawal rate should obviously be based on the higher number.

The 4% guideline is a reasonable starting point for withdrawal sustainability, but be sure to take your own situation into account before taking 4% and running with it. Your anticipated drawdown time horizon is a crucial input. The original 4% research was based on a 30-year time horizon, but if your time horizon is shorter (you're an older retiree) or longer (you're young), you'll want to adjust accordingly. This video discusses various withdrawal-rate strategies as well as their pros and cons. The minimum RRIF withdrawal factors published by the CRA tell you how much you have to withdraw from your registered account each year based on your age. Many retirees have savings in taxable accounts as well as registered ones, so RRIF withdrawals don't have to be your only source of portfolio income, but you can use the factors as a guideline to adjust your overall withdrawal rate.

Asset allocation is also key: Over time, portfolios with higher equity weightings have tended to support higher withdrawal rates than portfolios positioned more conservatively. Of course, the past may not be predictive. And in any case, much of the recent research related to withdrawal rates points toward connecting your withdrawals to market action. Even if you don't want to employ a fixed annual withdrawal rate (versus a 4% initial withdrawal, adjusted upward for inflation), which can result in radical swings in spending, being willing to spend less in down markets will improve the sustainability of your plan.

2. Check the asset allocation of your long-term portfolio.

Your withdrawal rate is the key gauge of the viability of your plan, but your portfolio's asset allocation is a close second. Bonds have been no great shakes lately, but not having enough safe securities could force you to withdraw from stocks when they're down, which could impede your portfolio's long-run sustainability. If you err on the side of holding too much in safe securities, you run the risk of inflation gobbling up your meagre returns and then some.

As regular readers know, I like the idea of using your own anticipated portfolio withdrawals to determine how much to allocate to the ultrasafe (cash), reasonably safe (high-quality bond), and aggressive (equity) portions of your portfolio. This article delves into the different ways to customize your withdrawal strategy from each of these three main buckets, outlining the pros and cons of each.

Bonds have been flat to down this year, so it's not hard to see why many investors would be feeling iffy about them. But it's also useful to remember that starting bond yields are predictive of what to expect from the asset class. Even though rising yields cause bond prices to decline in the short term, investors will benefit from those higher yields over time. If you own a significant allocation to bonds in your retirement portfolio, just make sure your portfolio includes ample inflation protection, too, via inflation-protected bonds and equities, especially.

3. Take a closer look at your cash.

In addition to checking up on your long-term portfolio, also take a closer look at liquid reserves. I've often written that six months' to two years' worth of portfolio withdrawals is a reasonable allocation to cash for retirees. But with higher cash yields coming online, I can't quibble with the idea of retirees pushing their cash holdings up a bit, perhaps closer to three years' worth of portfolio withdrawals. The yield differential between CDIC-insured cash instruments and high-quality bonds is still pretty low. Moreover, interest-rate increases are a net positive to cash investors, but they can hurt bond investors, as discussed above.

Opportunistic retirees might also consider maintaining additional liquid reserves to facilitate bargain-hunting if equities or bonds fall. Just be choosy on the cash front: The cash portion of your brokerage account likely offers a paltry yield, whereas online savings accounts, GICs and T-bills look a lot more compelling. In other words, you're often sacrificing a lot for the convenience of having your cash live side by side with your investment portfolio, as is the case with the brokerage accounts.

4. Develop an action plan for RRIF minimum withdrawals.

If you're aged 71 or over and have RRIF accounts, start thinking about where you'll source the minimum required withdrawals. You have until year end to take them, but don't wait until the very last minute. Many retirees snip their withdrawals from the income their securities kick off, which creates ready-made cash. Other retirees might employ rebalancing to generate distributions; that has the salutary benefit of reducing risk in their portfolio at the same time. Retirees taking the latter route today might consider trimming their equity exposure, especially the growth equities that have performed best, to help source their withdrawals.

It's also worth thinking through the interplay between the withdrawals amounts and your withdrawal rate. If your withdrawals are more than you need for spending or are going to take your overall withdrawal rate above your comfort level, you can reinvest them in a taxable account or, more simply, make the withdrawal "in kind" by transferring the investment from your RRIF to your taxable account.

5. Revisit your charitable giving strategy.

Of course, you're giving to charity to help, but as with portfolio withdrawals, it's worthwhile to use charitable donations to help improve your portfolio. If you're planning to make a sizeable gift to your favourite charity, for example, why not raise the money required by selling a chunk of the most appreciated (and arguably the riskiest) securities in your portfolio? The resulting tax deduction would at least partially offset the taxes you would pay on the RRIF withdrawal. In a similar vein, if you're planning to make a charitable contribution from your taxable account, you can donate highly appreciated assets and circumvent the taxes on that appreciation. (The charity will, too.)

About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.