Why Seniors Need a Different Investment Mix

Investors moving into the retirement years will want to carefully examine the asset mix in their portfolios. Fact is, the time horizon for recovering from mistakes is much diminished. But there are often different taxation issues as well.

You’re in your 60s, and retirement is no longer just a speck on a distant horizon. It’s getting closer and you can start the very agreeable task of contemplating how you want to spend the rest of your life.

But before you get too carried away, there’s one major chore to do and that’s ensuring you have a proper mix in your portfolio that will carry you through your senior years.

There are two major issues at work here – one, you may want to cut down on riskier investments such as equities. And two, you’ve been used to paying straight income tax most of your life. Living off investments means having to work to optimize the most beneficial tax regime for you.

“If nothing else, it is a good sort of life event to trigger you to look at your investments that you might otherwise have ignored for years and years at a time,” said Jason Heath, a Certified Financial Planner and Managing Director at Objective Financial Planners in Richmond Hill, Ont.

“It may cause you to change the way in which you invest and there’s more reason to determine the right sequence of withdrawals from accounts in order to pay the least amount of tax.”

A major decision involves how much money to leave in stocks and how much in fixed income. There have been some general guidelines over the years, such as being 100 per cent invested in the stock market – minus your age. But with interest rates still very low as a result of the 2008 financial collapse, that could be outdated.

In any event, it’s a very personal decision.

Derek Moran, a Registered Financial Planner with Smarter Financial Planning in Kelowna, B.C., said it can make sense to have most of your money in equities even post-retirement when the time horizon is long, — say more than five years — or if the person has sufficient savings to only need the income to live.

“I have many 80- and 90-year-olds that have all or the majority of their investments in equities,” he said.

“Since they understand what they own, have held through ups and downs and love the rising income and preferential tax treatment, they don’t see it as risky at all.”

But understanding risk is always critical and Heath says it’s important to pose an important question in the wake of the ’08 collapse.

“One of the ways I discuss asset allocation is asking people: `Could you stomach your portfolio going down by X thousands of dollars?’ and try to assess what should an asset allocation be if someone is comfortable seeing a 50 per cent drop,” he said.

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If they’re OK with that, “arguably they could be in an all equities or close to all equities portfolio.”

But most people are not at that point.

“I think that having some fixed income component always makes sense despite the low interest rates just because you never know when you’re going to lose a job or you’re going to have something extraordinary happen or even if you’re an aggressive investor and call it a bit of a cushion from a market correction,” he said.

Another important decision involves how much money you will need from your investments – and how you will access it. Those particularly well-fixed will decide to just live off the income from dividends and coupon payments.

For others, the decision revolves around how much to draw down from capital. Some suggest that four per cent a year would be reasonable.

But Moran observed that the figure is an average, “which can be very misleading.”

“Also, it assumes half the portfolio is in bonds, which pay virtually nothing.”

Heath pointed out that there are other variables, including “are you expecting to downsize your home at some point. Are you expecting an inheritance at some point? Do you have long term care insurance?”

“You can start with the four per cent guideline but it’s a rough guideline.”

Most people give little thought to taxation since most have spent their working life shelling out straight income tax. But that can change when income is coming from investments. For example, you would want to keep your equities in non-registered accounts (as opposed to putting them in an RRSP) so you can take advantage of the dividend tax credit.

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“And you would be surprised how many investment advisors have their clients with the identical asset allocation across all of their accounts,” said Heath.

“You can hold the exact same investments in a different way that can make a huge impact in the long run.”

The important thing is to start thinking about these issues early – and to do it in partnership with an advisor who knows her way around investments and taxation.

“Even the more average Canadian with more modest assets still has decisions to make and it might only be a one-time exercise to figure it out,” said Heath.

3 years ago