For the past six years, retirement has been "absolutely perfect" for Mary and John, who both turn 61 this year. The Toronto-area couple travel for a month every March, spend time with their family and dote on their three grandchildren, while John tries to sneak in a round of golf whenever he can.
It's a comfortable life, but a concern always lingers.
"I've been semi-retired for six years and two questions always surface," John says. "Will I have enough money to make it to the end? And is my portfolio mix right for us?"
The financial collapse of 2008 destroyed a lot of retirement dreams, and even those who escaped unscathed are hesitant about the markets. That's on top of life expectancies which are stretching beyond what financial advisers of yesteryear could have imagined.
"We basically do what we want, when we want, without letting money get in the way," says John, a former manufacturing executive. But this hinges on his calculations: "My cash-flow projection is so key to our success."
He's projected the couple's savings to age 92, and he believes there's enough to take them as far as 100.
The couple has $40,000 in fixed annual expenses, and estimates an additional $75,000 in variable expenses for 2013. They try to keep fixed expenses lower than their fixed income (their pensions are valued at about $45,000 a year).
"Although this may be deemed too low, we do a great job at continuing to negotiate lower bills, et cetera, to offset any inflation," John says.
But there are factors that could play against them. They hold two mortgages for family members, but once the first is paid off in six years, their $54,000 in annual mortgage income will drop by two-thirds, reducing their cash flow; they could face expenditures from unexpected health concerns; and a market correction could throw their investment income off track.
"Although we are confident, who knows what the world will bring," says John, who budgets 4-per-cent equity growth and 2-per-cent fixed income growth annually.
John's a careful planner, but he's worried about the safety of his assumptions about inflation, rate of return and portfolio risk. For advice on John and Mary's portfolio, we turned to two financial experts: Jillian Bryan, vice-president and portfolio manager with TD Wealth Private Investment Advice in Vancouver, and Warren MacKenzie, president and chief executive officer of Weigh House Investor Services and a certified financial planner.
– $45,000 in personal pensions ($3,000 indexed to inflation).
– $5,700 in combined Canada Pension Plan payments.
– $10,000 in part-time income.
– $1.4-million in RRSPs and tax-free savings accounts, delivering $22,000 in income annually.
– $54,000 in mortgage income ($17,000 annually in six years).
Jillian Bryan's tips
1. Avoid 'haircut:' The couple should look at the equity-based assets in their portfolio, Ms. Bryan says. She points to overlap between their individual stocks and some of the funds they own, such as the Dow Jones Canada Select Dividend Index Fund. She recommends Mary and John keep with their strategy of looking for individual, dividend-paying blue-chip stocks, like banks and telecom companies; even if they buy a high-priced stock that falls, regular dividends will earn their money back more quickly. Ms. Bryan also warns that they should keep an eye on where they hold certain assets: There's an emerging markets fund taking up all of John's TFSA, for instance, that's too exposed to volatility. "He could get a haircut on that overnight," she says. That can hurt in the bigger picture, as capital losses in a TFSA can't be used to reduce taxes on capital gains outside of the account.
2. Watch interest rates: John and Mary's mortgage income will be dropping in six years, meaning they should be gradually moving their assets into fixed-income securities to compensate for the lost regular income. But to keep their investments secure, Mary and John should steer clear of investments that wouldn't benefit them if interest rates rise, such as fixed-income securities and real estate investment trusts. Ms. Bryan recommends holding actual bonds instead of bond index funds, laddering the bonds to provide a steady income stream. Additionally, she says, "floating-rate securities are a great way to participate if interest rates were to rise."
3. Watch inflation, too: That's not the only aspect of their portfolio that could be shifted by external forces. The majority of their personal pension income – $42,000 of it – is not indexed, so Mary and John need to regularly assess their portfolio to make sure its growth beats the rate of inflation. "You have to be conscious of inflation, because it can really eat into your purchasing power," Ms. Bryan says. The couple also needs to consider shifts on a personal scale. "Variable expenses comprise a majority of their expenses, and they should be careful that they don't dwindle their nest egg faster" than they plan.
Warren MacKenzie's tips
1. Make date to rebalance: John and Mary have a clear idea of the products they're comfortable with, Mr. MacKenzie says, including dividend stocks, gold and exchange-traded funds – and have an idea of where they want to invest geographically. "But there is no evidence of an overall investment strategy that tells them when to rebalance the portfolio," he says, which can indicate a lost opportunity, because the "process is more important than the investment products." This doesn't need to be complicated, Mr. MacKenzie says. "It can be as simple as a written plan to rebalance when market forces cause an asset class to breach the acceptable range. But in the absence of a written investment process most investors will be guided by their emotions and this usually causes them to increase or reduce exposure to equities at precisely the wrong time."
2. Keep things simple: The couple's portfolio – a mix of 65 individual stocks and funds – is too complicated, Mr. MacKenzie says. "Most of their positions are too small to make any noticeable difference, even if they doubled in value," he says. "If they do not have performance information that proves that their individual security positions have done better than the ETFs, they should stop trying to beat the market by buying individual securities. If they want to do it themselves, they should simplify their portfolio and hold between six and 10 ETFs."
3. It's all in the mix: If they shake up their portfolio, John and Mary may also want to reconsider their asset mix. Right now, they aim for a 50/50 mix of equities and fixed-income assets. Equities tend to be higher risk, but the couple looks for large-capitalization, sector-leading stocks that pay out a dividend – a good rule of thumb, but Mr. MacKenzie says that they should focus instead on an equity/fixed ratio that achieves returns that match their desired spending levels. "If they are not in the right asset mix, they will be taking more risk than necessary, or they will be leaving additional potential returns on the table," Mr. MacKenzie says.
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