Consenheim: Two ways to handle retirement funds yield vastly different results

Les Consenheim Financial Adviser / Kamloops Daily News
January 30, 2013 01:00 AM

I remember relating a tale of two investors in the past, but this time, I thought I would highlight two investors seeking retirement income from two different directions.

Al is 68 and just wound up his successful career as a milkman. He has paid off his house and saved $500,000 in his RRSP. He is collecting full Canada Pension Plan and Old Age Security benefits.

His CPP and OAS pay him $1,500 a month or $18,000 a year.

His dilemma is that he has always been what we might call an old-school investor. His RRSP is usually invested in a combination of GICs, bonds, cash and stocks.

In the current environment, GICs and bonds are yielding two per cent, cash maybe 0.75 per cent and stocks
(blue-chip dividends) in the range of three to five per cent.

So in a typical situation of 60-per-cent fixed income, 30-per-cent stocks and 10-per-cent cash, Al would be looking at an income of around $12,375 per annum, or 2.5 per cent.

What does Al do in these circumstances? Sticking with his traditional portfolio positions, he bumps his equity position to 60 per cent, reduces his bonds and GICs to 35 per cent and reduces his cash to five per cent. This increases his income to around $15,700, or 3.1 per cent.

Al has increased his income by $3,325 or by around 11 per cent (based on total income including CPP and OAS) but he has also increased his risk situation substantially. If we were to experience a market
as we did in 2008-09, he could reasonably see the value of his portfolio decline by more than $100,000.

Betty is in a similar situation, with government benefits producing $15,000 a year and RRSP of $500,000. During her career as an aerospace consultant, Betty has taken a more diverse view of the world and her portfolio reflects that fact.

She has built a portfolio that incorporates a few more of the alternative asset classes. Her portfolio breaks down as follows: five-per-cent cash (0.75-per-cent ROR) 15-per-cent mortgages (six-per-cent ROR), 20-per-cent global bonds (five-per-cent ROR), 20-per-cent real estate (seven-per-cent ROR), 30-per-cent diversified yield (five-per-cent ROR) and 10-per-cent hedge (six-per-cent ROR). Based on this portfolio makeup and estimated returns, Betty's income from her RRSP would be $27,000 a year or 5.4 per cent for a total income of $42,000.

Incorporating these alternative asset classes into her portfolio definitely takes a greater level of understanding, but the payoff is worth it for Betty. She has invested the time to familiarize herself with the fundamentals of these asset classes, understands the risk levels and has come to see how they move relative to one another.

Not only does Betty have a better understanding of her portfolio, which brings her peace of mind, she has a substantially higher income as well.

Les Consenheim is a financial adviser with Raymond James - Consenheim and can be reached at 250-372-8117 or les.consenheim@raymondjames.ca. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.This article is for general information purposes only. The views of the author do not necessarily reflect those of Raymond James. Individuals should seek professional advice prior to acting on any information referred to herein.


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