You won't see Jim Otar in one of those glossy finance industry ads showing retirees climbing mountains or sailing into the sunset. The Richmond Hill, Ont.-based author and financial planner's message is far less glamorous and, for some, downright frightening. He says retirement plans for most baby boomers are grossly unrealistic.
At the heart of what he sees as an impending disaster for many boomers approaching age 65 is a basic finance industry assumption that a balanced retirement portfolio can generate an average annual return of 8 per cent.
"You cannot use averages for returns and apply it to individuals," he says. "What happens if you have a bad market or a black swan event like we had last year?"
That black swan event, known more commonly as the market meltdown of 2008, slashed the value of Canadian equities by half in the span of six months and decimated many retirement portfolios. The market recovered about half of those losses in 2009, but for retirees drawing income the damage is done. "If you have any loss in your portfolio and you are taking money out it's possible you will never recover no matter how well the markets do," he says.
For many boomers heading into retirement the tragedy is compounded by heavy debt loads, scant savings and longer life expectancy.
Mr. Otar, who began his working career as an engineer, says another stock market rally is unlikely and turns to history to make his point. He looks at sideways equity market trends from 1900-1920, 1939-1949 and 1966-1982 and compares them to the two recent major declines in 2000 and 2008. "All these sideways trends had at least three or four ups and downs," he says. "We have to suffer through this more."
As a result he suggests investors cut their average annual return expectations in half, to 4 per cent, and focus more on managing risk. During the market meltdown losses for his clients were minimal, with his riskiest portfolios losing 15 per cent. "I'm not looking at how much money I make in 'up' markets, but I'm looking at how little I lose in 'down' markets," he says.
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Mr. Otar's retirement plan calls for strict discipline and no debt at retirement - that includes mortgage debt. The math is simple: to calculate your annual retirement allowance, divide your total savings at age 65 by 30. The plan still applies if you live beyond 95 years because living expenses tend to diminish in the later years of retirement, and there should be savings to spare - enough even to compensate for increases in the overall cost of living.
Mr. Otar recommends ultraconservative investors nearing retirement age put all or part of their savings in an inflation-indexed life annuity - an insurance product that provides a predetermined income for the holder until death. "Buy a life annuity and you don't have to ever worry about markets, asset allocation or where your money is coming from."
For younger or more risk-tolerant investors wanting to squeeze a little more out of their portfolios he suggests a more aggressive strategy - well, aggressive for him. For the time being he recommends that at least 70 per cent of the entire portfolio be cash, to be deployed when the markets and economy are more stable.
Most financial advisers recommend a large weighting in bonds for steady income and a counterbalance to equities, but Mr. Otar says corporate bonds are too risky and government bond yields are too low. "If you're not going to make money in bonds you might as well not make money in cash," he says.
Once interest rates and bond yields rise he recommends a 30 per cent weighing in Canadian government bonds and a 15 per cent to 20 per cent stake in real return bonds as a hedge against inflation.
On the equity side he suggests a dividend-yielding Canadian equity exchange traded fund. The dividends will generate income and keeping it Canadian will avoid currency risk. One ETF he says fits the bill is the Claymore S&P/TSX Canadian Dividend ETF.
He sells mutual funds but admits he prefers exchange traded funds. "ETFs are much more transparent, much less churning ... and the cost is much less." On the point of management costs he crunches the numbers again: $1-million in a mutual fund with a management fee of 2 per cent over 30 years adds up to $30,000 versus $7,500 for an ETF with a 0.5 per cent fee.
When it comes to timing the markets he's much less certain. He concludes that a buy-and-hold strategy will not work in the current investment climate but refuses to be pinned down by market or economic projections. "I leave that to clairvoyants and economists, as our society has traditionally tolerated these two groups to make forecasts."
Dale Jackson is a producer at Business News Network.