APPROACHING RETIREMENT? HOW MUCH CASH SHOULD YOU CARRY?

Several years ago you started to seriously assess your sources of income in retirement. You identified your guaranteed  government benefits of CPP &  OAS, plus rrsp, tfsa and non -  registered investments. You may be one of the  fortunate few to have a private pension plan.

You have determined your desired level of income in retirement,  as well as what your likely life expectancy is. The ducks are all nicely lined up in a row and you retire. Then............., the stock market  goes down, sharply.

Goldman Sachs research data shows dating back to 1945, the S & P 500 index has had some two dozen corrections, averaging - 13% over a four month period. Digging deeper into their research, eleven times the market dipped - 20%, which is defined as a bear market. On "average", these bear markets typically last about 13 months.

The age old question of how much cash, bonds and equities a person should hold in their personal investment portfolio has no single answer. Every case is different, but conventional wisdom has tended to indicate the closer a person gets to retirement, the less exposure to non guaranteed investments they should own. One reason for this is in many cases, once retired, the capital we retire with is likely all the capital we are ever going to have, barring significant family inheritances.

Something I recommend to clients approaching retirement  is to establish a pool of guaranteed assets from which they can draw income during a difficult time, such as the one we are discussing here. Let's look at someone with $300,000 in retirement funds.

I make an assumption a balanced portfolio can produce an income of 4% per annum over the long-term, without encroaching upon capital. So on $300,000, that 4% equates to $12,000 per annum.

Using this guideline, I typically set aside a minimum of 3 - 5 years of income into that guaranteed pool. This would equate to some $36,000 - $60,000 of capital, from which the person could draw income if required. This provides a guaranteed source of income so the person does not have to sell stocks/mutual funds to generate income.

Nothing of course  is guaranteed.  But ensuring you have an amount of guaranteed cash set aside as a buffer, specifically designed to generate income, seems prudent.

For any additional information, please email Bob at robert.davies@manulifewealth.ca

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