A well-designed retirement portfolio has multiple layers of defence against a stock market correction.
One is a cash holding to cover financial emergencies. Another is a mini-ladder of guaranteed investment certificates that mature in one and two years. Each GIC holds enough to cover one year's living expenses. If stocks tank, you have time to let things recover because your expenses are covered by safe investments.
These defensive strategies are an answer to a question from a reader who sees a hole in all the coverage of retirement investing. "There's plenty of info on personal finance investment strategies for retirement, but not much on smart strategies to shift to withdrawing the retirement funds to minimize impact of a market downturn," she said.
The usual portfolio diversification principals apply to retirement portfolios – you'll need to mix stocks with bonds to reduce vulnerability to big market corrections. The old rule was to weight stocks using a percentage derived from subtracting your age from 100. With longer lifespans, it could make sense to subtract your age from 110, or even 120 if you are comfortable with stock market risk and expect a long life.
But many of the financial planners I've spoken to over the years believe that retirement portfolios require additional layers of defence. Some believe in keeping one or, better, two years' worth of expenses in GICs. That way, you never have to worry about selling hard-hit stocks or equity funds to cover living costs or to fund your mandatory annual withdrawal from a registered retirement income fund. Instead, you use the money from a maturing GIC.
Every year, you'll cash in your maturing one-year GIC and buy a new two-year deposit. Yields aren't very good these days for short-term GICs, but you should be able to get at least 1.5 per cent from smaller banks, trusts and credit unions. That will keep you even with the recent inflation rate.
On top of your GICs, think about adding a layer of defence based on cash held in a high interest savings account. This is money you could withdraw quickly to cover an emergency expense – maybe related to a health emergency or house repair.
Stock market corrections are inevitable if you're going to be in the market. With a proper defensive plan, the impact on your retirement savings can be managed and minimized.
Rob Carrick