4 Attributes for Retiree Portfolios
Are you wondering how you should construct a portfolio for retirement income?
The fact is that retiree portfolios should be designed for the individual circumstances of each retiree. The building blocks may be similar, but how we arrange them will vary quite a bit from person to person.
In this video I am going to walk through the 4 main attributes or criteria that retirees should be considering when they arrange their income sources and investments for retirement. I will then describe investments that can satisfy each of the 4 criteria. I will close the video off with a few examples to illustrate how different investments can complement different retirees’ situations.
Before I jump into the 4 criteria, I want to give credit to Darryl Diamond who wrote the book “Retirement Income Blueprint”. His book was one of the first books I bought when I started focusing my practice on retirement income planning. This list of characteristics and criteria is comes from his book and I have found it to be very useful way to think about retirement income. I will include a link in the description section below in case you are interested.
So, to set the stage, before we begin building a portfolio of investment assets or arranging retirement income sources, we need to ask ourselves what it is that we are trying to accomplish?
In the case of retirement income planning, we are trying to create definite and reliable income for an indefinite and uncertain amount of time. We hope that we will live long and healthy lives, but we don’t know if we will. We hope that the markets (stocks/bonds) will perform well, but we don’t know for sure if they will. We hope that we don’t have any unplanned expenses and health emergencies, but we know that we may. And we also want to make sure that we can choose to change.
So, when arranging our retirement investments, we need to make sure that our overall retirement income plans include financial products or income sources that deliver the following 4 attributes / hit the following 4 criteria
Certainty comes from income sources that you know will not go down unexpectedly. That income can cover a short time period, or the rest of your life. These income streams are unaffected by changes in interest rates or the equity and bond markets.
Financial products and income sources that can satisfy this criteria are:
- Canada Pension Plan
- Old Age Security
- Private Pensions
- GIC’s (certain term)
Here we are describing assets that have the probability, but not the guarantee, that they will rise over time and outpace inflation. Here we are taking on more risk in order to get higher long-term returns. In the short and medium term, we need to be prepared that investments in this bucket are going to fluctuate in value. For this reason, any withdrawals that we are making from these sources need to be visited and re-visited on a regular basis to make sure that withdrawals are sustainable over the long-term.
Financial assets that satisfy these criteria are:
- Equity funds
- Bond funds
- Real Estate Investment Trusts (REIT’s)
Flexibility means having assets that you can turn to when life throws you curve balls in retirement. Here we are thinking about negative situations like a large unexpected expense, and positive situations like an unplanned gift that you want to give to a loved one, or the desire to purchase a vacation property in retirement.
To assess how flexible our retirement assets are, we want to know how quickly can it be turned into cash? And, once we own it, can we change our mind and change it to something else later.
Financial assets that satisfy this criteria are:
- Debt (Line of Credit/Reverse Mortgages)
- Equity and bond funds
This criteria is less-often spoken about, but it is critically important – especially for retiree couples. Perpetuity is the measure of how an asset or income stream survives once the owner is no longer here. So, in the case of a retiree couple – does the income stream or asset live to be passed along or continue to your spouse? Or, to another loved one?
Stocks/Bond funds, cash, life insurance, and GIC’s would rank higher here – they can be rolled over to a surviving spouse, or passed down to beneficiaries through the estate and, in some cases, bi-pass the estate via beneficiary designations (RRIF, TFSA, LIF).
4 Criteria/Attributes in Action
Both members of the couple have a defined benefit pension plans that are not indexed to inflation. They will receive CPP and Old age security. Their projected income streams will just cover their planned spending in retirement. They have very little in the way of other savings, they rent their home.
Their plan ranks high on certainty
It ranks medium on perpetuity
It ranks low on flexibility and probability
They may consider focusing on building up a “war chest” of cash and possibly a portfolio of equity funds and bond funds to help them build some protection against an unexpected expenditure (flexibility) and to provide them with some additional protection against inflation (probability)
Couple owns a business and has accumulated significant retirement assets, both inside and outside of the corporation that they have invested in a portfolio of equity and bond funds. They have not consistently contributed to CPP over the years. They own their home outright. When they sell their business next year, they expect they will have enough money saved up that they can generate about 2/3 of their planned retirement spending from their stock/bond portfolio, and the rest from CPP/OAS.
Their plan ranks high on probability and perpetuity
Their plan ranks low on certainty
Their plan also ranks low on flexibility
While they can convert stocks/bond into cash quickly in an emergency, if the need arises mid-retirement AND that coincides with a major market event, you could argue that the income portfolio is not in fact flexible.
This couple might consider taking some of their accumulated savings and purchasing an annuity to increase the ratio of guaranteed income that won’t coincide with the market. Or, they may at least consider delaying taking CPP/OAS to increase those future benefits which would increase their certainty.
1. The “perfect retirement portfolio” doesn’t exist in a vacuum, it has to be constructed for each retiree based on their own unique circumstances
2. I encourage you to review your own retirement assets against our criteria listed above and see if you have any gaps:
3. If you are unsure about where you stand and want to get a second opinion, check out the resources in the description below. I’ve included a short retirement readiness quiz that you can complete, after-which I will send you a brief, personalized video with some high level suggestions and thoughts that might point you in the right direction.
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article was written, designed and produced by Mark Walhout, CFP®, an Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc.The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities.
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