Life changed in the pandemic, but investing for retirement has not.
Provided some thought was put into it, the same mix of stocks and bonds you had before COVID-19 still makes sense. So does the same toolbox of investments. New sectors, funds and strategies aren’t necessary.
Still unhappy with how your retirement portfolio held up in the pandemic? Then look to a foundational bit of retirement planning that reveals its value only when stocks are being crushed.
Some financial planners call it the cash wedge, others the bucket approach. The basic concept is to have enough cash or safe, liquid investments in your registered retirement income fund to cover at least three years’ worth of living expenses. That way, you’ll never have to sell any of your investments at a low point in order to pay for living expenses or to make the minimum annual RRIF withdrawal.
With 51 years of combined experience between them, financial planners Rona Birenbaum and Clay Gillespie have both come to appreciate the virtues of having a cash cushion for the portfolios of people approaching or already in retirement.
“Where I learned about this was back in 2000, when the average balanced fund went down about 13 per cent and then people were making withdrawals,” said Mr. Gillespie, a certified financial planner (CFP) and managing director at RFG Integrated Wealth Management in Vancouver. “I’m going, man, there has to be a better way.”
Mr. Gillespie starts setting aside money for retirement living costs when a client is about five years away from leaving the work force. Right now, he’s using guaranteed investment certificates maturing in one or two years to hold this money. When the client was a year from retirement, maturing GICs would be routed into an investment savings account.
This cash wedge or emergency bucket is generally housed within a RRIF. If it comes time to withdraw money from the RRIF and stocks have been crushed, you leave them alone and instead draw from your cash holdings in the plan.
“You never want to have to sell your beloved equities at a time when they’re undervalued,” said Ms. Birenbaum, a CFP whose firm is called Caring For Clients.
Her view on cash in a retirement plan is that there should be enough to cover expenses for as many as four to five years, which should be long enough for stocks to recover from an extreme drop. Her preferred cash vehicles include high interest accounts, high interest savings accounts packaged as mutual funds and diversified short-term bond funds.
Financial shocks seem to happen with some regularity – there was the crash of tech stocks in 2000, the financial crisis in 2008 and the pandemic in 2020. Given that COVID-19 is not yet under control, the current shock may still cause further financial damage.
If you don’t have a cash wedge and think you need one, Ms. Birenbaum suggests taking the money from bonds and bond funds that have held up well lately because they hold government and high-quality corporate bonds.
Stocks are still down a fair bit from pre-COVID days, but Mr. Gillespie says he thinks they’ve rebounded enough for investors to draw from them in building cash reserves. Ideally, though, you build up your cash stash using investments that are coming off a period of strong returns.
“The toughest part of the strategy is when the stock market is up and I’m selling stuff earning 20 per cent to buy stuff earning 2 per cent,” Mr. Gillespie said.
The payoff: That 2-per-cent return from savings accounts and GICs looks pretty good when the stock market is down 20 per cent.
It’s human nature to look at the damage done to portfolios in a stock market decline and wonder what changes to make. In a properly diversified portfolio, add a cash cushion where needed and tune out the hype over sectors, stocks and funds that are having their moment in the pandemic. Ms. Birenbaum certainly isn’t buying anything trendy for clients.
“It’s hard enough to get people to invest properly in the fundamental investments that underlie the capital markets, stocks and bonds,” she said. “If you can do that simply and well, you really don’t need to add complexity to your life.”
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