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(lev dolgachov/ISTOCKPHOTO)
(lev dolgachov/ISTOCKPHOTO)

PORTFOLIO STRATEGY

The case for owning stocks when you’re a senior Add to ...

Peter Hambly and his wife could squeak by without stocks in their retirement portfolio, but having them reduces the couple’s stress about money.

Yes, reduces stress. Mr. Hambly’s pension plus payments received from Old Age Security and the Canada Pension Plan just about cover living expenses for him and his wife. His investments, 95 per cent in stocks, cover vacations, new cars, helping their children and emergencies.

Owning stocks is uncomfortable in times like these, this 67-year-old Hanover, Ont., resident readily agrees. But it’s better than the alternative – returns in the range of 1 to 2.5 per cent from guaranteed investment certificates. “At 2 per cent, we run out of gas in our mid-80s,” Mr. Hambly said in a summary of what his own spreadsheet analysis shows.

Today’s investing dilemma for seniors: Stay safe and accept painfully low returns, or aim for more from stocks while accepting the risk of serious losses. Even after a nice little runup this month, the S&P/TSX composite index is down 16 per cent over the past 12 months.

We’ll look here at two approaches to investing in stocks as a senior, both of which address the anxiety people feel when the investments they built over decades of saving seem under attack. But let’s first look at the idea of having all or mostly stocks in your retirement portfolio.

Mr. Hambly’s pension and government benefits give him a guaranteed foundation that allows him to invest his personal savings in blue-chip dividend stocks. But even this retired banker and one-time certified financial planner (CFP) has been tempted to sell at times. “All through the summer of 2008 and for the next six months, I was watching the market crash and thinking, just cut your losses. But I didn’t, I let it go. Eighteen or so months later, we were back to where we were.”

Mr. Hambly believes he and his wife, Beverly, could get by with GICs, but that would likely require the sale of their house at some point. With an investment portfolio based on stocks, he expects to have much more financial flexibility over what could easily be another couple of decades. This view is right in line with the gung-ho-for-stocks approach advocated in The New York Times recently by David Levine, a 69-year-old former chief economist in the U.S. investment industry.

Mr. Levine argues for having 100-per-cent exposure to stocks because increasingly long lifespans require people to keep growing their assets, even after retirement. He also urges people not to worry so much about bear markets because they’ll be withdrawing money gradually over the years in both good and bad market conditions. They key is not to sell at a low point. (Note: I included links to Mr. Levine’s articles on retirees and stocks in a recent edition of my new personal finance newsletter. Subscribe to the newsletter here.

A portfolio of all or mostly stocks in retirement can make sense on paper, but it becomes intolerable for many people when the stock markets fall. So let’s consider an intelligent compromise of stocks and other investments.

We’re not talking here about the usual sort of diversification – mixing stocks, bonds and maybe cash. According to Alexandra Macqueen, a CFP and co-author of Pensionize Your Nest Egg, this approach to portfolio building works best in the years that you’re building up your retirement funds. Once in retirement, you need to additionally consider product diversification, specifically the inclusion of annuities into your holdings.

An annuity is an insurance contract to exchange a lump sum of money for a lifetime flow of monthly income (here’s a primer on annuities I wrote a while ago). “What do I do when stocks are volatile and fixed income isn’t producing the return I need? Find another product or asset that is uncorrelated,” Ms. Macqueen said. “This is the argument for the annuity.”

Here’s her suggestion approach for adding annuities to your retirement saving: Start with 10 per cent of your retirement savings at age 65, then add another 10 per cent at 70 and 75. The older you get, the more monthly guaranteed income you’ll get per dollar invested in annuities.

Mr. Hambly expects to put this strategy to work in two years’ time. He’ll use some of his retirement portfolio to buy an annuity that will augment the guaranteed income he now gets from his pension and government benefits.

Ms. Macqueen says that with an annuity anchoring your retirement savings, you can be aggressive in allocating the rest of your stocks. “You can ramp it all the way up to 100 per cent if you like. It depends on your personal circumstances – how much you need certainty [about the risk of losing money].”

Rona Birenbaum, a financial planner with Caring for Clients, suggests what has been described is the bucket approach for seniors who are nervous about holding stocks. One bucket holds enough cash to cover one year’s living expenses, another holds a mix of laddered GICs, short-term bond funds and sometimes annuities, while another holds stocks or equity funds. For a client in his or her 70s, 30 per cent of the assets to be invested might go into stocks.

Worried about falling stock markets? Ms. Birenbaum says the bucket approach should ease your mind. “The stocks part of your portfolio isn’t for now – it’s for when you’re 80 to 90,” she said. “And, frankly, if we get some good returns from stocks prior to age 80, we might want to sell some stocks.”

Ms. Birenbaum believes that some people shouldn’t be in stocks, period. She probes for this type of client by asking people what they did in previous bear markets. If they got nervous and sold, then she strongly recommends they avoid stocks going forward. If the client insists on stocks, she documents it in writing.

Finally, here’s a thought from Ms. Birenbaum for people who are still a ways from retirement: The more money you save, the more you’re able to use low-stress, low-return investments in your senior years. “If you can get where you want to go at 2 per cent and you’ll have the cash flow you need and address your estate planning desires, then you don’t need the stock market.”

Follow on Twitter: @rcarrick

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