A straight-forward approach to helping retired and cash-flow-focused investors sustain their investment income and preserve their portfolios through all market conditions.
Old risks remain, new risks emerge
For most Canadians, the coronavirus pandemic has been a healthcare crisis that has brought about an economic shock and what appears to be a relatively short-term market downturn.
However, for most retired Canadians – the age group that is most at risk from its effects – COVID-19 is a deeply worrisome and potentially deadly risk. What’s more, the pandemic brought with it the “COVID Crash” and subsequent sharp volatility. It further exacerbated the already historically low interest rate and bond yield environment that has challenged low-risk savers, as central banks slashed interest rates to stave off economic disaster.
These developments serve as important reminder of the vulnerability of retirees and cash-flow-focused investors to economic conditions that together could threaten their ability to sustain their retirement cash flow and preserve their well-earned nest eggs. In short, it is a reminder of the need to help ensure that these types of investors don’t have to change their lifestyles in the face of shrinking cash flow, or worse, face the ultimate risk of outliving their savings.
Playing portfolio defence
Fortunately, there is a way to ease these investors’ minds when faced with the twin threat of low interest rates and yields on fixed-income investments and volatile markets: the three-bucket approach. As long as it is aligned to their investment objectives and suitable given their risk-tolerance, retirees – and those whose primary portfolio goal is to produce cash flow to support their lifestyle – may wish to leverage this approach to help ensure that they have enough income to provide for their short-term needs, while still growing their portfolio over the medium- and long-term:
The three buckets:
- Short term – Income (1-5 years): The short-term bucket holds cash and short-term investments for cash-flow withdrawals and emergency funds, while also helping to reduce the impact of short-term market volatility on the portfolio.
- Medium term – Buffer (6-10 years): Holds income-generating investments, including low-risk, low-volatility equities for stable capital gains. This bucket serves as a buffer between the cash bucket and the long-term growth bucket.
- Long term – Growth (10+ years): Holds growth-oriented equity funds, which are more volatile but offer higher potential for capital growth to sustain the portfolio for the later years of retirement.
The best defence is a good offence
While hockey fans know that protecting the puck is a critical part of maintaining a lead, the other part is not getting so defensive that you are hemmed in to your own end by your opponent – more often than not, playing too safe leads to a loss. In order to protect your portfolio from impact of ongoing cash-flow demands, as well as the ravages of inflation, investors can use a well-structured and considered strategy that, if properly aligned to their investment objectives and risk tolerance, can help ensure they meet their long-term cash-flow needs and help preserve their retirement nest egg.
Contact me today to discuss how I can help you or your loved ones “protect the puck” with risk-appropriate strategies like the three-bucket approach.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of
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