National Post - Financial Post Magazine
FAMILY FINANCE
A COUPLE SEEM TO HAVE IT ALL, BUT THEY WORRY ANOTHER MARKET MELTDOWN WILL SET THEM ADRIFT IN RETIREMENT
A couple worry about the effect another market meltdown will have.
Max Loertschild*, 60, and his wife, Laura, 56, seem to be thriving in British Columbia. He is a management consultant with a $5,528 monthly take-home income, while she is a healthcare professional bringing in another $4,865. They have about $1.6 million in financial assets and, moreover, they are diversified, for their $612,000 house is just 37% of their total assets, a low percentage in the soaring B.C. property market. But they worry that another 2008- type meltdown could wreck their retirement plans since their portfolio will be their future anchor. “Our portfolio fell 20% during the 20082009 correction. It has recovered, but we are afraid of another 20% to 25% correction just a year or two before one of us retires,” Max says. “The brokers’ pitch of ‘thinking long term with investments’ wears thin as we get closer to retirement. It’s time to manage our accumulated wealth to minimize risk so that we can reap the benefits of our hard work and retire comfortably, that is, without worry.”
Fortunately, the outlook is far from grim. Most of the portfolio is comprised of large-cap Canadian equities and a few big U.S. names: Bank of Nova Scotia, power generator Fortis Inc. and JPMorgan Chase & Co., to name a few. But it largely reflects the broad Canadian and American stock markets, with all of their potential for wobble and transitory crumble.
The problem of reducing portfolio volatility has both a fundamental component and a psychological consequence. “In fundamental terms, it is only reasonable to cut the socalled beta, that is, the measure of how much a stock or other asset varies in comparison to the entire market, such as the TSX, which, as the referent, always has a beta of one,” says Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C. “With a low beta, stocks are steadier, their returns are more predictable, it’s easier to know when to sell to raise cash in comparison to the nail biting that goes along with very volatile portfolios. Low-beta stocks tend to be stabilized by their dividends, which is an aid in planning retirement income.”
In retirement, when the foundation has been laid in pensions and investment returns, it is important to know when to draw cash. That, in turn, depends on the components of retirement income and the expenses they have to support.
Max, who has worked full time since his late teens, will get the maximum Canada Pension Plan payout, currently $12,460 per year at 65. He remains a contributor and pays both his and his own company’s portion, a total of 9.9%. His benefits will not rise with future contributions, so he should stop paying himself a salary, which requires CPP contributions, and take dividends, Moran says. For her part, Laura can expect $9,345 a year from CPP on top of her annual provincial pension of $14,400, with what is likely to be substantial, if not full indexation.
Their RRSPs, with a current balance of $565,000 and growing at $12,000 a year,