For Canadians getting their investments in shape for retirement, or even those just now thinking of paying for life after work, the spring federal budget should have been something of a shock to the system.
By raising the age of eligibility for Old Age Security to 67 from 65, Ottawa moved the goalposts for millions of people and told them, in essence, to prepare for a less luxurious retirement than their parents enjoyed.
It was just the latest sign that the new retirement would not be like the old: Defined benefit plans have given way to less generous defined contribution plans, stock market losses have pushed out many people’s retirement horizons, and the huge run-up in home prices that translated into a retirement bonanza for retirees will likely not be repeated – in fact it has meant bigger mortgages and less for retirement for follow-on generations.
As a final headache for boomers now plotting their retirement, they are faced with historically low interest rates, making fixed-rate investments unattractive at the very time that they need their security more than ever.
John De Goey, a Toronto-based financial adviser to high-net-worth clients, expects the squeeze to continue.
“The first thing I would say is 67 is the new 65, and I don’t think we are done. … It always strikes me as odd that a generation ago people used to talk about freedom 55 and they weren’t recognizing the demographic trend was in fact going in the opposite direction.”
Mr. De Goey, a vice-president and associate portfolio manager with Burgeonvest Bick Securities, does not have an easy answer for people facing the challenge of ultra-low interest rates. He ticks off four main variables that investors can adjust when setting the stage for retirement: save more money; invest more aggressively and accept more risk (not necessarily a successful strategy over the past decade); accept a less glitzy retirement (by living on less money); or push out your retirement date (what Ottawa is encouraging everyone to do).
“My experience is that most people will not save more and people’s tolerance for risk will not change,” he said. “That leaves the last two: either work longer, or retire when you wanted to and accept a lower quality of life.”
The financial services industry has plenty of options for investors who are willing to give up the certainty of fixed income investments such as bonds and GICs for a better yield: real estate trusts, corporate bonds, preferred shares and dividend paying stocks.
“You are now taking on equity risk whereas a generation or two ago those people would be in GICs quite happily and not taking on any equity risk,” he said. “The only difference was they were being handsomely compensated because interest rates were high.”
Rather than opting for more risk and less fixed income in their portfolios, most of Mr. De Goey’s clients are being encouraged to work a little longer before retiring, which is not so bad given how life expectancy has improved since 65 was established as the retirement age.
While Bank of Canada Governor Mark Carney has made threatening noises about hiking rates, and the Paris-based Organization for Economic Co-operation and Development recently urged the country to raise rates, investment professionals are expecting low rates to continue to pressure safety-seeking retirees.
“It is getting more and more challenging, and it has been for the past two or three years now and more than likely will remain challenging for investors, especially those going into retirement or already in retirement,” said Serge Pépin, vice-president of investment strategy with the Bank of Montreal’s Global Asset Management.
BMO expects rates to budge very little over the next year or two. Mr. Pépin advises that investors adjust their portfolio mix to prevent the erosion of capital that happens when rates of return are lower than inflation.
“Investors really have to look beyond bonds, beyond GICs,” he said. “They should still be an important part of your portfolio, but definitely look for opportunities such as dividend paying stocks, preferred shares as well as REITs and energy trusts should probably be part of your portfolio as well.”
Angela Maitland, a Calgary-based vice-president and portfolio manager with high-net-worth firm Fiduciary Trust Company of Canada, also expects a “benign” interest rate environment but warns that given rates have only one way to go, investors should ensure that their bond holdings are not hammered in the case rates unexpectedly rise. Her advice: consider diversifying bond holdings by purchasing hedged global bonds, corporate bonds, real estate and dividend yielding equities.
The Calgary investment manager argued that it is not necessarily a more risky strategy.
“It depends on how you determine risk,” she said. “If the risk that you are facing is being able to preserve your lifestyle, then one might argue that they might be more risky. If you define risk purely as volatility, than yes, maybe.”
No debt, no risk
While record low interest rates are tempting many Canadians to accept more risk in their portfolios, David Trahair is having none of it.
The Toronto-based chartered accountant and author of three financial books, including the most recent, Crushing Debt, is 100 per cent invested in fixed-income securities in his RRSP, as is his wife. So are the RESPs for his children.
His investment strategy is simple: no debt and no risk. He dismisses investment industry arguments about historic stock market returns or how GICs have trouble keeping up with inflation.
“I don’t think inflation should have anything to do with what to invest in,” he said. “The problem that I have is that many people who try to push the stock market use inflation as an argument that people should accept more risk on their investments.”
Mr. Trahair has analyzed the 50-year returns of the Toronto Stock Exchange in the process of writing his books and understands the arguments in favour of equities.
“On average it is close to 10 per cent a year, which is fantastic. The problem is that most people get nowhere near that,” he said, noting that emotions often cause people to buy near market peaks and sell near market lows.
He invested for about a decade in equities before dumping them for the solidity of fixed income and has no regrets.
“My rate of return was pathetic,” he said. “Even if I switched investment advisers and all of a sudden I was going to start making eight to 10 per cent a year, I determined that getting out of debt including the house mortgage was my No. 1 priority.”