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Investing in your 60s

Apr 5, 2019 Media Morningstar

Morningstar, Diana Cawfield

As retirement looms, it is important to have a plan, and then invest accordingly, to achieve all your retirement goals

For anyone approaching their 60s, upcoming retirement becomes all too real. Extended beach vacations, travel, quality time with grandkids, all of it is within reach. But how will you pay for it? To fund an ideal retirement, for many, investing becomes a primary focus.

Morningstar’s director of personal finance, Christine Benz says that when it comes to investing in your 60s, the key thing to start with is to look at how much you have been able to save and how much the portfolio might grow before actual retirement.

Let’s take a step back. Before you start investing, it is imperative to have a retirement plan.

“If you haven’t done any retirement planning,” says Cynthia Kett, advice-only financial planner at Toronto-based Stewart and Kett Financial Advisors, “this is the time to do it, in your 60s.” When transitioning into retirement, Kett “strongly” recommends that individuals do what’s called an investment policy statement.

An investment policy statement considers details such as the assets available in your portfolio, the level of risk, the rate of return that you’re trying to achieve, the management of your portfolio, and the cost, among other parameters.

Based on over three decades of experience, Kett says there are two main types of scenarios in retirement – one-person households with single, separated, divorced or widowed retirees – and couples who work full time. In the case of single clients, Kett says that sometimes they’re cash flow poor and asset or house rich. In the case of a working couple entering their 60s, one of them might have a pension plan, but more common today is saving through Registered Retirement Savings Plans (RRSPs) or other investment savings.

In both situations, the investment planning process for retirement would be the same, but an individual’s financial situation, age, lifestyle goals, comfort level, and other multiple factors are all considerations in the actual investment process.

In all cases, appropriate asset allocation is key. “One thing that’s on the top of my mind right now, is the strong performance in the equity market over a decade,” says Benz, who points out that many people in their 60s, especially if they’ve been taking a hands-off approach in their portfolios, have a lot of stock exposure. “I would say at the portfolio level, that is the key thing to take a look at, and whether you might consider adjusting that equity piece downward a little bit,” she says.

To finance the retirement years, Kett often recommends that approximately 25% of a person’s net worth or assets should be invested in non-income producing real estate, such as their principal residence, and 75% invested in a diversified investment portfolio for cash flow and inflation protection.

But where should you invest that 75%?

Benz is a big believer in using a “bucket” approach to visualize what would be an appropriate asset mix, and that varies according to each individual. “The key thing to start with, is what your anticipated portfolio spending will be. For example, using the bucket strategy, I talk about earmarking a couple of years’ worth of portfolio withdrawal in truly liquid assets like cash (bucket 1),” says Benz, adding that assets in which you have a slightly longer horizon could go into high-quality bonds (bucket 2).

Kett also suggests that clients can minimize their market risk anxiety by allocating at least five to seven years of anticipated cash flow withdrawals to the cash equivalents and fixed income asset classes. “That way,” says Kett, “when you draw down on your investment portfolio for your cash flow needs, you will know that the money you need will be there. You don’t have to worry about whether or not it’s declined in value.”

If you have fixed, reliable sources of cash flow during retirement, for example, a pension, those sources can act as a kind of substitute for a component of fixed income that would otherwise have to be withdrawn from a portfolio. In this case, you would look at how much cash flow you would need in addition to what you’ve got coming in to fund your retirement lifestyle. Keep in mind that even though some people have very generous pension plans and CPP and OAS and rental income, some growth is needed in a portfolio to at least keep pace with inflation.

Finally, all remaining assets could go into stocks and higher-risk/higher-returning assets (bucket 3). That way, in a worst-case scenario of a lingering bear market for stocks, a retiree would have a ballpark of roughly 10 years’ worth of withdrawals in cash and bonds to draw from before touching the equity holdings, says Benz.

Withdrawals are a key consideration, Benz says, asking “If I’m going to be retired for another 25 or maybe 30 years, how much can I withdraw from that portfolio annually to ensure that I don’t prematurely deplete my money?”

She says that “sustainable withdrawal” is key, adding that this is an area where even dedicated, do-it-yourself investors should get some outside guidance if they’re not comfortable with researching that issue on their own.

“It’s such an important consideration that you don’t want to mess it up,” Benz says.

When it comes to withdrawals, based on extensive academic studies, another noteworthy point for retirees or pre-retirees to take to heart, is to be a little bit flexible during periods of market stress. “So, for example, if your portfolio drops by 25% or more,” says Benz, “you can plan to cut back on your spending in those years to leave more of your portfolio in place to recover when the market eventually does. That’s one of the best things you can do to greatly improve your portfolio’s sustainability.”

Finally, retirement really comes down to lifestyle choices.

For the single, house-rich retiree, for example, deciding on whether to continue to live in a house is a major consideration in retirement planning, Kett says. When she illustrates to clients that in order to keep the house their lifestyle is going to have to scale back considerably, sometimes they think about whether that is what they really want to do.

In conclusion, in your 60s, as retirement looms, it is imperative to have a plan, then invest based on what you’d like your retirement to look like!

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