Retirement savings: Don’t be too conservative

Many people I have spoken to have become more conservative with their investing approach since the market meltdown of 2008-09. That’s understandable. After two big crashes in the first decade of this century (the high-tech collapse from 2000 to 2002 was the other) some people see GICs, government bonds, and savings accounts as the only way to protect themselves.

However, a new survey from Russell Investments, carried out by Harris/Decima, warns that being too cautious may be dangerous in itself. Almost two-thirds of respondents (64 per cent) said they expect to be “much more conservative” or “somewhat more conservative” with their money after they retire. That’s up from 58 per cent in the previous survey.

That attitude could be dangerous, the report warns. Proprietary research conducted by Russell Investments concludes that there are three sources of investment income in retirement: money saved while working (10 per cent), growth before retirement (30 per cent), and growth after retirement (60 per cent). Their study found that ” A remarkable 88 per cent of Canadians are unaware that 60 per cent of their investment income during retirement can come from growth that takes place after they retire”. What they found instead was that those surveyed believed that only about 20 per cent of investment income would come from growth after retirement whereas they thought that almost half (49 per cent) would be from money saved while working.

“If Canadian investors continue to underestimate the need for investment growth during retirement, they could become too conservative with their investments and potentially miss out on generating that very important 60 per cent of their investment income during retirement,” the report says.

Russell’s solution is a retirement portfolio with an asset mix of 35 per cent equities and 65 per cent fixed-income securities. The report describes this as “an ideal b alan ce”, not just for the post-retirement period but over a lifetime. It goes on to state: “It’s not too heavily weighted in equities, so volatility is relatively low. And there is enough long-term growth potential to sustain a stream of income that lasts a lifetime”. You can view the entire report here.

The implications of this study are significant and may send many readers back to take a fresh look at the asset allocation in their RRSPs and RRIFs. I suspect that in a large number of cases, perhaps a majority, the weighting is too heavily towards equities, which will greatly increase risk.

I have long maintained that RRSPs and RRIFs should be invested conservatively, using professional pension fund managers as the model. If this is done properly, TFSAs and non-registered accounts can then be run more aggressively with view to maximizing growth.

That said, a lifetime 35 per cent-65 per cent equities-fixed income split strikes me as a little too conservative. I’d be more inclined to go with a 60-40 split to age 45 or thereabouts, then gear down to a 50-50 allocation until age 60 (this assumes a retirement age of 65). After that, I’d move to a mix of 40-60 until retirement and finally to Russell’s 35-65 division.

The important point to take away is to always retain some growth potential. Putting all your money in GICs is a sure way to deplete a RRIF quickly since the return won’t come anywhere close to matching the annual minimum withdrawal requirement.

Gordon Pape’s new book is The Ultimate TFSA Guide , published by Penguin Group Canada. Order your copy now at 28 per cent off the suggested retail price by going here.

Photo © YinYang