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Investment Strategies for Retirement

Key Takeaways:

  • You might feel more comfortable investing only in Canadian companies, but doing this may mean taking on more risk than necessary.
  • Before you retire, make sure you identify your long-term financial goals.
  • We think the best way to start designing your retirement income strategy is to first get a better understanding of your income sources and separate investment from non-investment income.

Investors have almost always searched for low-risk, high-return investment strategies that allow them to retire comfortably. However, there is a risk-return tradeoff in all investment strategies and there is no one-size-fits-all approach to retirement planning. Developing a strategy for retirement takes an understanding of diversification, your long-term goals and how you will pay for retirement.

Understanding Diversification

Investors often have a tendency to invest in companies and securities with which they are most familiar. To some, this might make sense. After all, why put your hard-earned money in an area of the market you don’t understand? The problem with this philosophy is you may be limiting your investment opportunities and your options may be too restrictive. For example, domestic markets only make up a fraction of global stocks and you could be taking on unnecessary risk by limiting your investments to your home country.

Failing to diversify outside of country lines can mean taking on additional political risk—the risk of an investments returns could react as a result of political changes—and country risk (the risk that a country underperforms ).  In addition to taking on unnecessary risk, you could be missing out on additional growth opportunities around the world. Three of the largest countries within the MSCI World Index—the United States, United Kingdom and Japan—make up around 76% of all world stocks.[i]

Determining Your Long-Term Goals

Before you develop any kind of investment strategy, you must first define and understand your long-term financial goals. Some of the most common financial objectives include:

  • Increasing Wealth: Some investors enter retirement without the fear of running out of money. For these individuals, their goal may focus around growing their savings to have the ability to leave money to heirs or a charitable organization. For these individuals, a growth-oriented strategy may be appropriate.
  • Avoiding Running Out of Money: This is a very common goal we hear from investors. Some individuals enter retirement with a fear of having to go back to work at some point. Investors often believe that opting for lower-volatility investments is the best way to prevent themselves from running out of money in retirement. However, to ensure you will have enough money to combat the effects of inflation—as well as prepare for any unexpected expenses—you might need more equity exposure than you originally thought.
  • Spending Everything: Some investors enter retirement with this objective and want to spend every dollar of their hard-earned money. However, this can be a risky proposition, as there is no way to tell how long you will live and they could run out of money sooner than they think. What if you live longer than you thought or have unexpected medical costs? These things can make it incredibly tricky to time your spending just right.
  • Maintaining Current Lifestyle: You have worked your whole life to retire, so why not enjoy it? A common goal for retirees is to maintain or improve their lifestyle once they retire. For these individuals, their portfolio will likely need to grow enough on average to provide necessary cash flows and combat inflation.

Once you have an understanding of your investment goals, you can start to think about how you plan to generate income in retirement.

Retirement Income Tips

We believe the first step of determining how you will pay for retirement is by calculating all of your non-investment income sources. The most common sources of non-investment income we come across include:

  • Salary: Do you plan to work in retirement? If so, estimate how much you can expect to receive.
  • Pension: If your employer offers a pension, try to determine how much you can expect to receive. Your employer may be able to provide an estimate for you. Remember, a Registered Retirement Savings Plan (RRSP) does not count as a pension plan and should be considered investment income.
  • Canada Pension Plan (CPP) or Quebec Pension Plan (QPP): Canadian residents who meet the minimum contribution qualifications, can expect to receive a set amount of from the Canadian Government on a monthly basis. For more information on how much you can expect to receive, check the Government of Canada’s website.
  • Business or Real Estate: If you maintain a business interest or an investment property, you can include any money that you might receive as non-investment income.

We believe asset allocation is the single largest factor in generating a portfolio's return. Asset allocation is your portfolios mix of stocks, bonds, cash and other securities. Some investors’ instincts tell them to play it safe when they hear that asset allocation is the most important part of their retirement strategy. However, this mindset could mean running out of money faster than you planned.

If you are looking to combat the impact of inflation and reduce the impact of your withdrawals, you may need to maintain equity exposure in your RRSP—or any other retirement account you have.

A common retirement misconception that we come across is that it is safe to withdraw 10% annually from their portfolio based on stocks 10% annual returns dating back to 1926.[ii] To lower the risk of running out of money in retirement, you may be better off limiting withdrawals to 5% annually (which may differ based on your personal situation and needs) from their RRSP or any other retirement account.

What Retirement Strategy Is Right for You?

Determining which retirement strategy will best suit your retirement income needs is not an easy task. Luckily, Canadians have a number of tax-friendly investment tools that can help them save. The closer you get towards retirement, the more important it is to make sure that you get it right. If you would like help in planning the next stage of your life, Fisher Investments Canada can help. Contact us or download one of our guides to learn more.

[i] Source: FactSet, as of 29/04/2019. The MSCI World Index measures the performance of selected stocks in 23 developed countries. Values may not sum to 100% due to rounding.

[ii] Source: FactSet, as of 18/1/2019. Based on 9.9% annualized S&P 500 Index total returns from 1926 – 2018.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns.