This year's regular RRSP season may be over, but for Canadians moving on to retirement, the tough part has just begun.
There's an oft-cited rule of thumb that by the time you reach retirement, your RRSP should be a mix of 30 per cent equities and 70 per cent "safer," fixed-income assets. Not everyone is lucky enough to have a full nest egg ready by retirement, though. Circumstances – job loss, injury, illness – can force even the savviest of investors to draw down from their carefully constructed life savings. When that's the case, playing by the rule of thumb when you retire might not leave you with enough income.
Being aware of this is more important today than ever, as Canadians deal with portfolios still battered from the 2008 financial crisis. And contributions aren't getting any higher: Bank of Montreal's annual post-RRSP deadline survey found that Canadians contributed just $3,544, on average, to their registered retirement savings plans this year – nearly 25 per cent less than last year.
The fear of inadequate savings for retirement can lead to a great temptation to play the stock market harder, with hopes for higher returns than bonds and other fixed-income securities. It's a dangerous thought: By playing the stock market during or just before retirement, you're exposed to a great deal of volatility with no time to bounce back from a tumble. But if it looks like the only option, some investment strategies are safer than others.
They are all conservative – but, naturally, still risky.
Seek out dividends
"You have to have the stomach for that volatility," says Howard Kabot, vice-president of financial planning at Royal Bank of Canada Wealth Management. He's keen to warn that if retired investors wake up every morning to check the performance of their RRSP stocks and fret over each fluctuation, "It's probably not worth the stress it's causing."
With that caveat, Mr. Kabot says there are certain routes that are less dangerous than others for clients who need to "add some steroids to their portfolio" during or near retirement.
Experts recommend strong, dividend-paying companies when you need more exposure to stocks at this age. Mr. Kabot recommends blue-chip stalwarts such as banks, utilities and telecommunications companies.
"They're all mainstream companies. Very well-run, large-cap companies. Those are good places to start," he says. Over time, these will generally perform well and move in a positive way.
The dividends, he points out, are the most important part. "If the stock is not growing, then you should be getting paid to hold the security."
Serge Pépin, vice-president of investment strategy at Bank of Montreal Asset Management, also says that blue-chip stocks are among the safest bets – especially those in his own industry.
"Banks in Canada are boring investments," Mr. Pépin jokes. "But they pay handsome dividends. We've seen dividends increase, and payout ratios increase. … Banks know they have an appeal for those yield-hungry investors."
On top of dividend-paying blue-chips, Mr. Pépin suggests that high-yield bonds are a way to tap into serious income.
Otherwise known as "junk" bonds because they are below what bond-rating agencies such as Standard & Poor's and Moody's deem "investment grade," high-yield bonds offer a significant payout as a tradeoff for the risk they carry: Worldwide, Moody's estimates, about 5 per cent of these bonds have expired over time.
As such, for people at or near retirement, high-yield bonds carry much of the risk of the stock market in volatile economic times like today.
But Mr. Pépin points out there are numerous companies that offer high-yield bonds that aren't likely to disappear tomorrow. He suggests looking for well-known Canadian companies. Just because their bonds are high-yield, he says, "doesn't mean they'll go bankrupt tomorrow morning."
Guaranteed investments, Mr. Pépin says, "are fine and dandy – but they won't have that yield" that products like high-yield bonds offer.
Investors craving that yield have also recently turned their attention to real estate investment trusts (REITs), but Mr. Pépin warns of their sensitivity to interest rates. REITs perform well in environments like today, where Canada's benchmark interest rate sits at at a low 1 per cent – but at some point in the future, "There's only one way for interest rates to go."
Annuities and peace of mind
Mr. Kabot of RBC mentions another option for income outside the equity markets altogether. "Annuities aren't talked about a lot in this interest rate environment," he says. These products, which deliver regular payments from a lump-sum investments, have lower monthly payouts when interest rates get higher.
So while the potential for today's rates to rise makes annuities seem unattractive, Mr. Kabot argues that they have emerged as a viable option for retirement income, especially when compared with the volatility of equities.
"I think the [market] correction of 2008 has forced investors to think more closely about the risks they're taking in their portfolios, and perhaps whether or not they're willing to look at an annuity because of the peace of mind it's going to give and the guaranteed income stream it's going to pay, even if interest rates are relatively low," he says.
He suggests advisers, who don't often recommend annuities, "have to get in the mindset and be prepared to talk to clients about this."
What's most important in the end, says Jonathan Rivard, a financial adviser with Edward Jones in Richmond Hill, Ont., is that clients remember that income is still necessary in their portfolio after retirement – because they have to stretch their funds across the whole of the retirement period.
"I sit down with a lot of people who say, 'I'm too old to own stocks, Jonathan. I'm 60 years old.' And my next question is, 'Well, when are you going to die?' No one can answer that question."