I receive a lot of emails from individuals looking for advice on their financial plans. I hear from folks with eight-figure (yes, eight) portfolios and people getting by on a shoestring, individuals with full pensions as well as job-hoppers whose investments are a web of company pension plans and RRSPs in multiple silos.
If there's a unifying theme among many of these requests, it's that so many of them come from people who are getting close to retirement. While I haven't calculated a mean age for them, the vast majority of investors who submit their portfolios are between the ages of 55 and 65. Most of them are still working, but beginning to test the waters on retirement readiness. They'd like another set of eyes on the viability of their plans, as well as the positioning of their portfolios.
It's no wonder that so many investors seek out extra guidance at this life stage, because decumulation is fundamentally more complicated than building up a portfolio in advance of retirement. Investors hurtling toward retirement quite reasonably wonder about the viability of their plans -- whether they'll have enough and how much they can take out of their portfolios each year -- as well as the structure of their portfolios. In an era in which yields have dropped steadily downward for the better part of three decades, it's not intuitively apparent how to structure a portfolio to deliver the necessary cash flows for retirement.
As you plot out your strategy at this life stage, here are the key tasks to tackle.
Nourish your human capital
In previous articles geared toward early- and middle-career accumulators, I emphasized the importance of continuing to invest in your human capital -- your lifetime earnings power. True, large-scale outlays of time and money to build up your resume don't usually make a lot of sense later in life, but investing in continuing education and staying current on developments in your field do. Keeping abreast of the latest technology developments -- both inside and outside of your workplace -- is also crucial. After all, the best thing you can do to improve the financial viability of your retirement plan is to put in as many years in the workplace as you can. While older workers were laid off at a lower rate than the general population during the recession, it took them longer, on average, to replace the jobs they had lost than was the case for their younger counterparts.
If you're not interested in sticking it out in your main career any longer than you absolutely need to, you might still consider an "encore career" -- a later-in-life job that's more gratifying and less taxing (but potentially less remunerative) than your main career. Being able to earn income from even a part-time job can reduce in-retirement portfolio withdrawals, thereby helping to ensure that your portfolio lasts longer than it otherwise would.
Start mulling your CPP/OAS strategy
Staying in the workforce up to or beyond traditional retirement age has another salutary benefit: It can help you delay applying for the Canada/Quebec Pension Plan and Old Age Security, thereby enlarging your benefit when you eventually do apply. This article looks at whether it makes sense to wait past age 65 to start collecting these government benefits.
Couples should take special care to strategize about government benefits together, with an eye toward minimizing their tax bill on income from the CPP/QPP. (If one spouse has earned less and receives a lower pension benefit, the higher-earning spouse who receives a higher pension can allocate part of that pension to the other. This results in a tax-savings because part of the income is taxed in the hands of the spouse who faces a lower tax rate.)
Maintain your safety net
The usual insurance recommendations apply for the years leading up to retirement: property and casualty, personal liability, health and disability, of course. If your children are grown and off your payroll, it's also wise to revisit your need for life insurance at this stage; while life insurance can make sense in some instances, you'll have less of a need for it once your dependents are grown.
Maintaining an adequate emergency fund remains important at this life stage. Because higher-income and/or more specialized jobs are often more difficult to replace than is the case for people who are earlier in their careers, consider holding at least a year's worth of living expenses in liquid assets, rather than settling for the standard advice of three to six months' worth. There's an opportunity cost to holding too much cash, of course, but having an adequate cushion will keep you from having to raid your retirement assets prematurely.
Assess the adequacy of your portfolio
With five to 10 years to go until retirement, it's time to take a close look at the viability of your portfolio. It's not too early to apply the 4% guideline to your nest egg: Is 4% of your total retirement portfolio -- less whatever your tax rate is -- an amount that you could live on, when combined with other income sources like government benefits or a pension? For a more detailed check on your portfolio's viability, use a retirement calculator like this one provided by the federal government.
Even if you've been a dedicated do-it-yourselfer throughout your investment career, this is also an ideal life stage to check in with a financial advisor to assess the viability of your plan, as well as the structure of your portfolio.
The good news is that if you have five to 10 years left until retirement, you still have some levers left to pull if it looks like you could have a shortfall; working past 70 won't be your only option.
Embark on a pre-retirement saving sprint
Many parents spend their 40s and 50s multitasking on the saving front, stashing money away for both college and retirement (and often beating themselves up for not doing a great job on either). With college expenses receding in the rear-view mirror, your final working years before retirement are an ideal time to give your all to retirement savings. You should still favour tax-sheltered vehicles like TFSAs and RRSPs at this life stage, making sure you've used up all your contribution room from previous years.
Building assets in non-retirement accounts will also provide valuable flexibility once you begin drawing down from your accounts in retirements. By employing tax-efficient investments like equity exchange-traded funds, you can reduce the ongoing tax drag on your taxable portfolio. Moreover, you'll be able to enjoy today's relatively low capital gains rates when you withdraw your assets, giving you valuable flexibility to control your tax bill in retirement.
Build your stake in safer securities
As retirement approaches, it's crucial to begin reducing risk in your investment portfolio. Holding a share of your portfolio in lower-risk assets like short- and intermediate-term high-quality bond funds can help you reduce the damage from what retirement researchers call sequence of return risk -- the possibility of encountering a lousy market early in your retirement years. That risk is one that people approaching retirement should be keenly attuned to today, owing to not-cheap equity valuations. By holding enough assets in safer securities as retirement approaches, you can help safeguard against the need to withdraw from stocks when they're depressed, thereby improving your portfolio's long-run viability.
Yet even as pre-retirees need to build an adequate cushion in safer securities, it's crucial to not go overboard. People in their 50s and 60s still need plenty of stocks, as they likely have 30 or even 40 years ahead of them. Thus, they have an ample amount of time to absorb the higher volatility that comes along with stocks in exchange for the potential for higher returns.
Think about withdrawal sequencing
If you still have five to 10 years before retirement, it may seem premature to start thinking about which accounts you'll draw upon when you begin spending from your portfolio. But doing so before retirement approaches can influence how to position each of those pools of money.
The standard sequence for in-retirement withdrawals is taxable accounts first, followed by RRSP, with TFSAs last in the queue. That argues for putting more liquid assets in your taxable accounts (which you have probably done anyway, assuming you're holding your emergency fund there). Meanwhile, the most aggressive, highest-returning assets (usually stocks) belong in your TFSA accounts. Because they will likely fall into the intermediate part of your distribution queue--and also likely compose the biggest share of your portfolio--your tax-deferred accounts can hold a blend of safer, income-producing securities like bonds as well as higher-returning, higher-risk assets like stocks. This article takes a closer look at the topic of withdrawal sequencing.
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