How will my Investing Change in Retirement?

Once you retire, your investment goal will change significantly from when you were saving for retirement. Your objective now should be to generate a maximum after-tax income from your savings for the rest of your life. Of course, one of the main considerations is the safety of your money - especially in current market conditions. The greatest risk in retirement investing is not the loss of assets due to fluctuations in the stock market, but running out of money while you are still alive.

Many retired people have seen a dramatic drop in their invested capital and may be inclined to sell everything and invest entirely in Guaranteed Investment Certificates (GICs). However, this could result in losses in your investment portfolio with no opportunity for recovery and your capital depleting while you still need it. Both inflation and taxes can inflict damage not only on your income but also on your ability to maintain your capital over a long period of time.

For example, you have $300,000 outside your RRSP and need $20,000 a year in income from it. If you invest the entire amount in a GIC at 3% interest, you will receive $9,000 a year in interest income.

The $9,000 of interest is taxable at your highest marginal tax bracket (assume 45%). So after-tax you would receive $4,950 a year or 1.65% of your original $300,000. If long-term inflation were running at anything higher than 1.65% (it is currently around 2%) you would actually end up with a negative return on your investment!

This means that if you take $20,000 of income from your investments from the time you turn 65, after tax and inflation you would have no more capital in 15 years or at age 80. However, a large percentage of the population in Canada can anticipate living beyond the age of 80. And these will be the years when extra money is most needed to live comfortably. As well, many people would like to have some money left to leave to their children and grandchildren.

What are my options?

One recommended strategy is to divide your investment portfolio into three portions by time period and manage each one based on its individual objective. These categories are:

• Short-term money
• Mid-term money
• Long-term money

Short Term Money

You invest $100,000 from your $300,000 for a five-year period ($20,000 a year) in what is referred to as a "laddered GIC strategy". A laddered GIC just means that the maturity dates of your GICs are staggered so that each year $20,000 plus interest comes due. When a GIC terminates, it should be placed in a money market mutual fund from which you can withdraw what you need to satisfy your annual income needs.

Year One: $20,000 - money market (totally liquid)
Year Two: $20,000 - 1 year GIC
Year Three: $20,000 - 2 year GIC
Year Four: $20,000 - 3 year GIC
Year Five: $20,000 - 4 year GIC

Mid Term Money

Out of the remaining $200,000, you invest $100,000 for a minimum of five years. 60% of this $100,000 should still be held in fixed-income investments (cash, bonds, income trusts, etc.). It is generally not recommended that you invest more than 40% of the portfolio in growth or equities. Equities should give the portfolio the opportunity to increase during this time, without a great concern for short-term volatility. We also recommend that the equities that you do purchase contain a high degree of dividend-paying stocks. This way you can generate income from your mid-term money to be re-invested in short-term money for extra income. At the end of five years, you can begin to draw income from this portion of the portfolio at the rate of $20,000 (indexed for inflation) a year.

Long Term Money

You should be prepared to invest the remaining $100,000 of your portfolio for ten years or more. Since this part of your portfolio will not be used for income purposes for at least ten years, you can afford to take more risk with it. This amount should still be balanced between fixed income and equities, but with 60% in equities and 40% in fixed income investments. Once your funds that were invested over the mid term have been exhausted, you can begin to draw income at a rate of $20,000 per year (plus inflation) from this money.

Why should I use this approach?

This strategy should help you realize better returns on your capital over the long run. As well, a much larger portion of your investments will generate capital gains and dividends, which benefit from preferential tax treatment.

We should point out that every situation is different and this plan may not be appropriate for you. However, if you are interested in exploring this approach to managing your money in retirement, please do not hesitate to contact our office for an appointment.