Why Your Retirement Investments Need a New Job
For most of your working life, your investment portfolio has one primary job: help you accumulate wealth for the future.
Retirement changes the assignment.
Once employment income stops, your investments may need to start producing the cash flow that supports your lifestyle. At the same time, portions of your portfolio may still need to grow for expenses that are 10, 20, or even 30 years away.
That raises an important retirement planning question:
Should the portfolio that got you to retirement necessarily be the same portfolio that gets you through retirement?
Not always.
In this episode of the Retiring Canada podcast, "Why Your Retirement Investments Need a New Job," we explore how matching investments to future spending needs can help turn a retirement portfolio into something much more purposeful: a source of future retirement paycheques.
Retirement changes the job of your investments
Market volatility can be uncomfortable at any stage of life, but during your working years, a market decline may primarily be an emotional challenge.
You still have employment income. You may still be contributing to your investments. And, depending on your circumstances, you may have little reason to sell investments during a downturn.
Retirement can be different.
Once you've turned on the tap and begun drawing income from your investments, a significant market decline may affect not only the value of your portfolio but also the assets you need to sell to fund your lifestyle.
That makes retirement income planning about much more than choosing a mix of stocks and bonds.
It requires asking:
What does this money actually need to do, and when does it need to do it?
What is asset-liability matching?
Asset-liability matching is an investment concept long used by institutions such as pension funds and insurance companies.
In simple terms, these organizations have future financial obligations. They have an idea of how much money needs to be available and approximately when it will be required.
Instead of looking exclusively at maximizing investment returns, assets can be structured in consideration of those future obligations.
A similar concept can be applied to personal retirement planning.
During retirement, your annual spending creates a series of future cash-flow requirements. CPP, OAS, pensions, rental income or other sources may cover the difference.
Think of that difference as the portion of your retirement paycheque that your investments need to provide.
Turning retirement spending into an investment plan
Consider a simplified example.
Suppose your household's retirement lifestyle requires $140,000 per year before tax.
You receive:
$40,000 from CPP and OAS
$30,000 from pension or rental income
$70,000 still required from your investments
Let's also assume you have a $ 1.5 million investment portfolio.
We now know more than simply how much money is invested.
We know what some of that money needs to accomplish.
Approximately $70,000 may be required to help fund the first year's lifestyle. Another amount will be required the following year, and additional withdrawals may be required in subsequent years, potentially adjusting as spending and inflation change.
Some portfolio assets therefore have a relatively short time horizon.
Other assets might not be needed for 10, 15 or 20 years.
Why should all of those dollars necessarily have the same investment job?
Money for next year has a different job than money for 15 years from now
Money you expect to spend relatively soon needs to prioritize the objectives to that shorter time horizon.
Money that may not be needed for another 15 or 20 years has a different assignment. It may have considerably more time to participate in long-term investment growth and help preserve purchasing power against inflation.
This is where retirement income planning and investment management begin working together.
Instead of looking at your portfolio simply as one large pool of investments, you begin identifying the purpose and time horizon of different portions.
How target-date bonds can fit into retirement income planning
One tool we use for many retired clients is target-date bond investments, sometimes referred to as target-maturity bond strategies.
Suppose your retirement plan anticipates that approximately $70,000 per year will need to come from your investment portfolio.
Part of the portfolio could potentially be structured around future withdrawals, with bond investments targeting different years.
For example:
A 2027 target-date bond investment could be aligned with income needs around 2027.
Another could target 2028
Others could target 2029, 2030 and later years.
Short-term savings may also be maintained for liquidity, unexpected expenses or additional security.
The underlying idea is straightforward: rather than simply saying, "I own bonds," you can begin assigning a purpose to particular assets.
"This money is intended to help fund 2027."
"This money is intended to help fund 2028."
"This money is intended to help fund 2029."
Now the investments are connected to the retirement plan.
Creating your own retirement paycheque
For perhaps 30 or 40 years, you received a regular employment paycheque.
You knew approximately what was coming in and built your lifestyle around it.
Then you retire and that paycheque might come from several places:
Canada Pension Plan (CPP)
Old Age Security (OAS)
Workplace pensions
Investment accounts
Registered Retirement Savings Plans (RRSPs)
Tax-Free Savings Accounts (TFSAs)
Non-registered investments
Holding companies
Rental properties
Other sources of income
The objective is to coordinate those sources.
Once you know how much must come from your investment portfolio, you can begin preparing for those withdrawals in advance.
Rather than reaching the point where you suddenly need cash and asking "What should we sell?", you've already incorporated future income needs into the plan.
Does this mean retirees should invest everything in bonds?
No.
Retirement may last decades.
Someone retiring at 60 or 65 could potentially need their investment portfolio for another 25 or 30 years, or longer. Over that length of time, inflation can substantially increase the cost of maintaining the same lifestyle.
That's why growth still matters.
Stocks and bonds can therefore have different jobs within a retirement portfolio.
Depending on the investor and the plan, bonds and other lower-volatility assets may help address nearer-term spending requirements, while equities can remain invested toward longer term growth objectives.
For more on inflation and retirement purchasing power, listen to Episode 39 of the Retiring Canada Podcast, where we take a deeper look at inflation and ways retirees can plan for its impact.
Instead of simply asking:
"Should retirees own stocks or bonds?"
Consider this question:
"What job does each part of my portfolio need to do?"
A word of caution about bonds and interest rates
Bonds aren't immune to market fluctuations.
The relationship between bond prices and interest rates became especially visible in 2022, when rapidly rising interest rates contributed to declines in bond values at the same time equity markets were also under pressure.
Target-date bond investments can fluctuate as well.
With an individual bond, holding the bond until maturity generally means receiving its face value at maturity, assuming the issuer does not default, while collecting applicable interest payments along the way.
However, an individual bond is not the same thing as a bond fund or target-maturity bond investment. These products can contain multiple securities, incur fees and experience gains or losses, and an investor should not assume that their original investment is guaranteed at maturity.
That's why selecting the right investment vehicle matters.
That's goal isn't to pretend volatility has disappeared. It is to understand the purpose, risks and time horizon of each investment within the larger retirement plan.
Investment allocation starts with your retirement plan
Before deciding how the portfolio should be structured, we first need to understand the retirement it's meant to support.
Questions can include:
How much do you want to spend?
When should you start CPP?
When should you start OAS?
Do you have a pension?
How much should come from your RRSP?
How should your TFSA fit into the plan?
When could non-registered assets be used?
Are there years when larger RRSP withdrawals make sense within the overall plan?
What major expenses are coming?
Perhaps you're buying a vehicle.
Maybe you're helping your children, taking a major trip or finally buying the RV you've talked about for years.
Those decisions influence how much money you need, when you need it and which account the money may come from.
Tax consequences should also be considered when deciding where withdrawals come from.
A retirement investment plan can provide something else: confidence
There's another potential benefit to giving different parts of your portfolio specific jobs.
For decades, you've probably been told to save, accumulate and avoid touching your retirement investments.
Then retirement arrives and you're suddenly supposed to start spending them.
That transition isn't always easy.
Even retirees with sufficient resources can find it psychologically difficult to draw down their savings.
A retirement income plan can help provide context:
"There's the money we plan to use next year."
"There's the money intended for the following year."
Meanwhile, another portion of the portfolio can remain focused on much longer-term objectives.
Instead of looking at one large account balance and wondering whether you're allowed to spend it, you have a plan behind the withdrawals.
Give every part of your retirement portfolio a job
Your retirement portfolio shouldn't simply be a collective of investments.
It should have a purpose.
Some money may help support your lifestyle next year. Some may be needed five years from now. Other money may not be touched for another 15 or 20 years.
Those dollars don't necessarily need to be invested the same way.
That's why, when we build a Fundamental Retirement Plan, investment allocation is connected to the broader retirement picture, including:
Retirement income
Tax planning
Healthcare considerations
Estate planning
Long-term lifestyle needs
The goal isn't simply to pursue the highest possible portfolio return.
It's to build a portfolio designed around the retirement you're actually planning to live.
Instead of starting with:
"What's the right mix of stocks and bonds?"
Try starting here:
"What does this money actually need to do for me?"
Once you understand the job, you can begin building your investments around your retirement rather than building your retirement around your investments.
Your actions items
Identify where your next retirement paycheque will come from
Look at your portfolio and ask:
Which investments are intended to fund my income this year?
If the answer is "I don't know," it may be worth taking another look at how your retirement investments and income plan fit together.
Look beyond asset allocation
Don't stop at asking how much you own in stocks and bonds.
Ask what each part of the portfolio is intended to accomplish and when you expect to need the money.
Build the investments around the retirement
If you'd like help doing the heavy lifting, visit retiringcanada.ca to learn more about the Fundamental Retirement Plan and how retirement income, investment, tax, healthcare and estate considerations can work together.
And be sure to listen to "Why Your Retirement Investments Need a New Job" on the Retiring Canada Podcast.
When it comes to your retirement, don't take chances. Make a plan so YOU can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed. This content is not intended to substitute for professional investment or tax advice. Please consult your accountant regarding your individual tax situation and seek advice from your financial advisor or another qualified financial services professional regarding your investment planning.