Investing tips for retired Canadians
When it comes to deploying an investor toolkit for retirement income, I’d point near-retirees and retirees to a book recently published by Toronto-based investment counsellor Patrick McKeough. The book, titled Pat McKeough’s Successful Investor Toolkit, is a distillation of McKeough’s long investment career, honed first at The Investment Reporter, and in recent years his own firm, The Successful Investor.
McKeough is definitely a stock guy and is not keen on bonds, even for retirees, particularly at these still low-interest rates. Whether you’re a mid-career investor still building wealth or starting to draw down on your portfolio, McKeough is consistent: he pounds the table for a conservative portfolio of quality dividend-paying stocks spread among the five major economic sectors (Manufacturing & Industry, Resources, Finance, Utilities and Consumer). And, he never fails to remind you, steer clear of stocks in the crosshairs of what he calls the “broker/media limelight.”
After all, long-term studies show that the stock market as a whole produces total pre-tax annual returns of 8 to 10%, or 6% after inflation, McKeough writes.
One colourful phrase McKeough coins is “pre-retirement financial stress syndrome.” The syndrome strikes when mature investors realize they may not have enough savings to generate the stream of retirement income they’d been counting on. While some investors are searching for one last desperate “hail Mary” gamble, McKeough advises the opposite: aiming for safer investments.
And while it may not be what some may want to hear, he suggests those suffering from pre-retirement financial stress adopt one or both of these two solutions: work longer and/or refine your spending. He challenges them to “turn frugality into a game.”
Retirement leaves you with lots of free time and filling it costs money, he points out. Postponing retirement or working part-time as long as you can will help create more current income and financial security, and with it more contentment and long-term health.
Naturally, the Registered Retirement Savings Plan (RRSP) will be the cornerstone for retirees. But the RRSP is not the place to hold speculative investments: those should be outside the RRSP where losses can at least be used to offset capital gains elsewhere. For those who own equity mutual funds, RRSPs are also good places to defer mutual fund taxes, which tend to accrue to actively traded funds that trade a lot. And McKeough’s third RRSP strategy is to confine early RRSP withdrawals to years of little or no income, something I wholeheartedly agree with.
But you shoudn’t devote too much of your net worth solely to RRSPs. In particular, don’t neglect the TFSA, or Tax-free Savings Account. If you have to choose between them, TFSAs should get the nod in years of low income and RRSPs when you’re in higher tax brackets. As with RRSPs, McKeough advises against putting high-risk investments in TFSAs: taxable portfolios are the place for speculations that may result in losses. In fact, an entire section of the book is titled “Risky Business: A few bad decisions can offset a lifetime of smart moves.”
That’s a sobering realization, especially for retirees or boomers on the cusp of retirement. McKeough also reminds us that TFSAs are NOT the place to hold dividend-paying U.S. stocks. In an RRSP, US dividend payers are exempt from a 15% withholding tax but that is not the case if they are held in TFSAs. TFSAs are good places to hold exchange-traded funds (ETFs) and REITs (Real Estate Investment Trusts).
In retirement, the successful investor operates quite differently than in the wealth accumulation days. You start your career with a savings and investment regimen that allocates money steadily to stocks in good times and bad, taking advantage of dollar-cost averaging, which lets you, as McKeough puts it, “profit from market volatility.”
But in retirement, “you reverse the process. You live off your dividends and sell stocks mainly when you need more money.” It’s natural to sell one’s lower-quality holdings first, which means you are steadily upgrading the quality of your investment portfolio. He advises against attempting to time the market and urges investors to “get used to uncertainty.” Investors think about the possibility of short-term declines too much: “Far better to focus on investment quality, along with portfolio balance and diversification.”
Sounds simple when you sum it up this way but as any seasoned investor can tell you, it’s not so easy in practice. While I’ve read McKeough’s previous books and articles for years, I nevertheless found it quite useful to have it all summed up in his “Toolkit” book. I’m pretty sure others will find it particularly useful in dealing with any incipient pre-retirement financial stress.