If you invest in market-based securities such as stocks and bonds, you are bound to experience the odd year of poor investment performance. This should be tolerable, even in retirement. What you want to avoid is having too many of the bad years early on in retirement.
Consider two retirees, Ed and Laurence. Both retired at the beginning of 2001 with $100,000 in their registered retirement savings plans. Ed chose to invest only in U.S. stocks, which mirrored the performance of the S&P 500, less fees. Laurence stayed in Canadian stocks (mirroring the S&P/TSX). Both paid investment fees of 1 per cent.
If neither of them ever made a withdrawal from their accounts, Chart 1 shows that Ed would be ahead of Laurence in January, 2022, by about 10 per cent.
Now let’s assume that Ed and Laurence drew a steady income from their portfolios over this 21-year period. Their withdrawals were based on the 4-per-cent rule which means they withdrew 4 per cent – or $4,000 – in the first year and then increased that amount by inflation in future years.
As Chart 2 shows, Ed is no longer doing so well. The balance in Ed’s account drops to just $6,500 by January, 2022. By contrast, Laurence still has $119,100 left at that point, which is more than when he started. How could this have happened?
Ed’s problems can be traced back to the first eight years – 2001 to 2008 – when his portfolio did terribly. The first decade of the 21st century is often referred to as the “lost decade” by U.S. investors. Even though Ed had much better investment returns than Laurence after 2009, the damage had been done.
The takeaway is that you absolutely need to avoid terrible investment performance in the first few years of retirement. This may involve pursuing some or all of the following actions:
Reduce investment fees.
Diversify geographically.
Consider investing in five-year guaranteed investment certificates while rates remain high.
Buy high-dividend Canadian stocks in safe companies (there are exchange-traded funds for these).
Put part of your portfolio in long-term government bonds (also ETFs for this).
Note the last three of these strategies are viable only because of the current high yields on certain stocks and bonds. Also, you might want to avoid the 4-per-cent rule for making withdrawals – as Ed shows, it’s not always safe.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
