Q&A: Planning for Retirement

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A reader wants to know. With a good defined benefits pension plan to cover basic costs, should all other savings be invested in stocks?

Q – I am helping some friends, a couple, with their financial planning. He has a really excellent defined benefit pension plan, which will fully cover their anticipated living and entertainment expenses at retirement, which is about 17 years away. They both also have small RRSPs.

I have been pondering the right type of investments and diversification for their RRSPs. My conclusion is that they could reasonably be invested 100 per cent in the stock market with the offset of the defined pension plan plus the extended time horizon. What are your thoughts for this scenario? – Paul W.


A – I have always taken the view that being 100 per cent invested in any single asset class is a bad idea. Your friend may have a great pension plan but as we have seen, there are no certainties in life. Some pension plans have had to cut benefits, including some government plans in the U.S. The RRSPs are a useful fallback position if anything untoward happens so I would prefer a diversified approach.

Fixed-income securities provide a cushion in the event of a stock market collapse. Moreover, as we have seen in recent years, including 2014, they will sometimes outperform the TSX.

I suggest you consider a portfolio that is, say, 70 per cenet equities, 30 per cent fixed-income, with the largest equity weighting being in U.S. stocks. – G.P.

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