2 tips to extend retirement funds

Canadians are living longer, and many are concerned their retirement portfolios will not last as long as they do.

Here’s how to help.

1. Stick to a modest withdrawal rate or fixed percentage

The new longevity requires a close assessment of how quickly retirement funds are drawn down. For instance, the practice of increasing withdrawals every year to keep up with inflation ensures you don’t have to give up any creature comforts. But it also ensures your retirement funds deplete quickly, and the cumulative effects of withdrawal rates can be dramatic.

Take a hypothetical $1-million portfolio whose holder retired in 1972. At a withdrawal rate of 8%, it was reduced to zero in just over 10 years. By contrast, a modest 5% withdrawal rate meant the portfolio lasted for more than 20 years. A 4% withdrawal rate resulted in the portfolio appreciating over the next 30 years.

2. Diversify portfolios

A diversified portfolio has a far better chance of lasting longer in retirement than a predominantly cash or fixed-income allocation.

The longer view of retirement requires investors to consider higher-yield assets such as equities, corporate debt and commodities, while managing risk and volatility over the long term.

On the equity side, dividend-paying stocks are standard elements in most retirement portfolios. And as people live longer, the importance of earning income while building wealth is a common theme.

Low-beta stocks typically don’t exhibit excessive volatility relative to the broader market. Diversified products like minimum-volatility ETFs can fine-tune risk in a portfolio by smoothing out its performance, especially on the downside.

On the fixed-income side, yields on safe-haven government bonds are low but there are other options, like corporate credit. Many companies are turn to the debt markets to raise capital, thanks to low borrowing costs and the continued tightness of bank lending.

Read more: Extending retirement funds

Noel Archard is managing director and head of BlackRock Asset Management Canada Limited.