This article was originally published in February 2014.

Living longer looks less like a benefit to Canadians who haven’t accumulated a nest egg large enough to accommodate 22 years of retirement spending (the life expectancy at age 65).

A recent ING Direct-Angus Reid survey indicates 45% of Canadians aged 55+ underestimate the cost of retirement. It also shows that about half of the 30% who are still working do so because they can’t make ends meet. These numbers become more menacing when one considers inflation. It hasn’t been an issue for decades, but if prices rise, a bad situation will become worse. Nothing’s accomplished by chastising these people for not saving more or starting sooner. Fortunately, there are strategies they can use to address the shortfall.


Making up for poor decisions comes at a price: either live with less expensive choices—Tim’s instead of Starbucks; fish sticks instead of quenelles de brochet in Nantua sauce—or take more risk.

Some investors are emotionally incapable of comprehending that adding risk could mean reverting to basic cable if they lose. As investment professionals, we haven’t spent enough time researching risk-return tradeoffs when financial ruin is one of the potential consequences.

A chart we provided last month (“You’re retired! Now what?”) shows a portfolio providing 4% of initial capital annually (adjusted for inflation) with 40% equities and 60% bonds has a 24% chance of being exhausted before the investor dies. That’s pretty high. A 30% equity, 70% bond portfolio has a one-in-three chance of running out of money. Although compliance departments might see these conservative asset mixes as appropriate for retirees, they increase the likelihood clients will run out of money. That should be advisors’ main concern.

Spending less is the only choice under these assumptions. But investors don’t need advisors to tell them that. They want a strategy.

Two-part strategy

Managing retirement finances is a two-part problem: saving and investing on one hand and spending on the other. That calls for a two-pronged strategy.

I’ve discussed the Yale Formula in a previous article (“Create sustainable portfolios”). The investment committee for an independent school’s endowment fund was looking to expand scholarships and bursaries, so it needed a way to grow capital through aggressive strategies while maintaining a smooth and reliable stream of income. Retirees drawing a steady income from their portfolios, without the capacity to increase savings, are in exactly the same predicament.

Conservative spending plus riskier portfolios

The Yale formula is a spending algorithm that recognizes these competing goals.

It bases 80% of the current year’s spending on last year’s amount, adjusted for inflation, and allows 20% to vary based on investment experience. This smoothes portfolio returns that would likely be more variable because of higher risk.

As an indication of the risk level of endowment portfolios, Yale’s 2013 policy asset mix had only 4% bonds, and Harvard’s, 11% bonds. Other foundations use variations of this spending policy, such as a moving average of annual returns, to smooth results. Regardless of method, the strategy is the same: set the spending policy first, and then build an investment portfolio to support it.

Yale and Harvard’s growing reliance on diversification to manage risk is evidenced by the number of asset classes they employ (see table). TMX-listed ETFs give investors good coverage of most of these asset classes, private equity and direct holdings of timber and farmland are exceptions (see “ETFs: Lower to higher cost,” below).


Taking more risk is necessary to grow capital. Having a spending policy linked to investment returns is sensible. Combining a conservative spending policy, like the Yale formula, with an aggressive but diversified portfolio addresses both the yin and yang of retirement investing.

ETFs: lower to higher cost

YaleHarvardSelected TMX-listed ETFs
Domestic equity6%11%HXT/VCE/VCN/ZCN/XIU/XIC
Foreign equity (US)8%11%XUS/VFV/ HXS/VUN/ZSP/XSP
Foreign equity (Int’l)VDU/XEF/XMI/VEF/XIN/ZDM
Emerging market equity11%XEC/XMM/VEE/ZEM/FDE/XEM
Private equity35%16%
Absolute return18%15%HMF/HHF
Domestic bond4%4%VSB/CLG/VSC/XEB/ZAG/CLF/ZFS
Foreign bond2%EXM/ZEF/HUF
High-yield bond2%CHB/XHY/ZHY/PFH/HYI
Inflation-indexed bond3%
Real estate22%10%VRE/XRE/ZRE/CGR
Natural resources7%13%HUC/HUN/PBO
Publicly traded commodities2%HBR/CBR