Lifestyle ColumnistsNeil McKenty
If you're reading this, chances are you're also reading other newspapers and magazines as well as tuning in to radio and television. While this is a great way of keeping up to date, it may also get you into trouble — if you're a retiree.
The trouble I speak of puts your retirement and estate goals at risk. Much of this information isn't suitable for retirees.
As an investment advisor specializing in retiree issues, I often meet people who are making wrong decisions. Once you are five years from retirement, the context for making financial decisions changes. The way Ted, 35 and Bill, 65, manage their finances has to be different.
At 35, Ted is probably entering his prime earnings period and is generating free cash flow from employment income, which is being used to pay off a mortgage, save for his children's education, and invest with long-term growth as an objective. He can afford to wait 30 years to reap the benefits of his investments before any withdrawals will be required.
At 65, Bill is no longer employed and is beginning to draw on the assets he has accumulated over his lifetime. Hismain objectives are to preserve his nest egg and to maximize the after-tax cash flow from his assets, while ensuring an efficient transfer of wealth to his beneficiaries.
Unsuitable strategies for retirees
Dollar-Cost Averaging — This idea requires investing new money. For the retiree, the overall goal revolves upon withdrawing money, not adding more money.
RRSPs — RRSPs are important vehicles to build wealth in a tax-sheltered environment. For Ted, there is no question that the advice is correct. Bill, 65, is looking for methods to withdraw from his RRSP, not add to it. Moreover, the deferral benefits of RRSPs reduce at 69 where the registered assets must begin to pay fully taxable pension income. In many cases, the RRIF minimum withdrawal rules create cash flows that the retiree doesn't even need. There are two problems with this: you should never pay tax on money you don't need; and these withdrawals often cause or aggravate the Old Age Security Claw-back problem.
Historically, equities provide the best returns, so buy and hold
Using this fact alone to determine the equity weighting in your portfolio has been disastrous for many. While markets haven't been good of late, Ted at 35 has the time to hold and wait for the recovery to come. Bill at 65 is subject to limitations in that cash flow is required, and he doesn't have 30 years to wait. The requirement for cash flows in addition to the reduction in value of the portfolio as a result of the market creates a risk for non-recoverable losses. Lately, many of the retirees I meet have much more equity than they should have.
How to avoid these traps
• Work with an investment advisor who understands retiree issues and specializes in creating after-tax cash flows, someone you are comfortable with, and who understands your personal goals and objectives.
• Have a framework in place to direct your financial decisions. This starts with a detailed projection of your after-tax cash flows and expenses for your statistical life span. This projection should then drive such decisions as (1) which assets and accounts (registered or non-registered) to withdraw from to maximize after-tax dollars, and (2) what minimum component of bonds & GICs should you maintain to ensure that the assets will be there when you need them. Only then can the excess be considered for equity investment that requires a longer-term outlook of 5 to 10 years.
Working within this framework is not an option — it's a requirement that most cannot afford to ignore.
Do you have questions or comments? Contact Charles Nudo at 832-8390.
Charles Nudo is an investment advisor with CIBC Wood Gundy in the Cavendish branch. The views of Charles Nudo do not necessarily reflect those of CIBC World Markets Research Dept. and should not be considered representative of CIBC World Markets Inc.'s beliefs, opinions or recommendations. This article is for the information of investors only. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of Canadian Imperial Bank of Commerce and Member CIPF.
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