1. Maintain a cash cushion
Keep a year or two’s worth of living expenses in a totally safe, completely liquid investment. That way, you won’t have to sell hard-hit stocks or equity funds to cover your mandatory withdrawals from a registered retirement income fund. Some seniors were forced to do this when the stock markets crashed in 2008 – 2009.
Forget money market funds for parking your cash. A much better bet is a high-interest savings product that comes in a mutual fund wrapper. You buy and sell these products like funds, and you get returns in the area of one per cent to 1.25 per cent, along with deposit insurance. Ask your adviser or investment dealer about these products.
2. Don’t give up on the stock markets
If you’ve made it to 65 years of age, you’re looking at a life expectancy of another 20 years or so (on average). One way to help stretch your retirement savings over that length of time is to keep a small percentage in the stock market to take advantage of its long-term growth potential.
3. Use a guaranteed investment certificate (GIC) ladder
Don’t guess where interest rates are heading. Divide your money evenly into guaranteed investment certificates (GICs) maturing in one to five years. When a GIC matures, buy a new five-year certificate. That way, you’ll always have money coming in to take advantage of higher rates. If rates fall, you’ll only have limited exposure.
4. Apply the 2008 – 2009 stress test
Familiarize yourself with the downside risk of any investment you own by checking how it performed in the financial crisis. You say the product you’re eying wasn’t around then? That means it’s untested. Take a pass.
5. Dividend income beats interest income
Sure, you want bonds and/or GICs in your portfolio but, unless you’re a capital C conservative as an investor, you also want a portion of dividend-paying blue chip stocks (or a fund that holds them). Yes, dividend stocks can fall in price. However, top companies in Canada have a great record for maintaining their dividends flowing even in tough times.
In a non-registered account, the dividend tax credit means you’ll get higher after-tax returns from a dollar of dividends than you will with a dollar of bond or GIC interest. One thing to note: using the dividend tax credit may trigger a clawback of some or all of your old age security.
6. Talk to your adviser
Go over each holding in your portfolio and discuss how it meets your need to preserve what you’ve saved over the years, generate investment income and possibly generate a little growth as well. Over the years, I’ve heard from dozens of retirees who found out how risky some of their holdings were only after they plunged in price. That’s an avoidable disaster.