Investing After Retirement… What Should Change?
Fee-for-service financial planner and founder of PlanEasy.ca
Should anything change when investing after retirement? Are there specific investment options for after retirement? Should you change your asset allocation after you’ve retired?
For the average retiree their investment portfolio will make up a significant portion of their retirement income. Most of us will receive some government pension from CPP and OAS. Some of us may also receive retirement income from a defined benefit pension as well. But even in those situations we’re probably still creating some retirement income from an investment portfolio each year and this income is critical to help us reach our spending goals.
Given investment income is such an important part of most retirement plans, should anything change when investing after retirement?
For some people the answer might be yes. But for most of us the answer is probably no.
There are a few important factors to consider when investing after retirement and the three big ones are asset allocation, investment fees, and complexity.
These three factors are important to consider when investing after retirement. Depending on how your investment portfolio currently stands against these three factors it may warrant making some changes before entering retirement.
Asset Allocation After Retirement
When investing after retirement should you change your asset allocation to something more conservative? Should you shift your asset allocation over time?
Maybe, maybe not. There are many rules of thumb that suggest that asset allocation should gradually change based on an investors age. These rules suggest an investors equity allocation should be equal to “100 minus your age” or “120 minus your age”. These rules of thumb would suggest that your asset allocation should change annually (or at least every few years).
But these rules may be too conservative and may not reflect other factors. Someone who is 70 would have a 30/70 or 50/50 asset allocation between stocks and bonds and this is despite having another 25-30 years of life expectancy! (Read more about longevity risk here)
There are many risks in retirement and one of those risks is being too conservative. A conservative asset allocation might reduce investment risk but it will increase inflation rate risk and increase the risk of running out of money in the future.
There’s a fairly good chance that a couple who is currently in good health will see one partner reach their early to late 90’s. That means we need to plan for a 30 to 40+ year retirement period in most cases. Over such a long retirement period we need to ensure our investment portfolio can grow, provide income, and still keep ahead of inflation.
The often quoted “4% rule” was based on a steady asset allocation in retirement. There was no reduction in equity allocation with age. The assumption was that a retiree would maintain their asset allocation from age 65 all the way to age 95.
When investing after retirement there are lots of factors to consider and using a “rule of thumb” will mean that you’re probably ignoring many of them.
Fees Are Important: Even More So In Retirement
Fees are always important, but when investing after retirement they become even more important. Investment fees represent the single largest drag on the average investment portfolio
Lots of people worry about taxes, but fees are the real anchor. And fees become even more important after retirement.
Investing after retirement is different because we’re drawing an income from our investment portfolio. We’re using our investment portfolio to support our retirement expenses. Investment fees are just another expense, and they can be HUGE!
It’s pretty common for a retiree to be paying $23,000+ in annual fees on a typical $1,000,000 mutual fund portfolio. This annual investment fee will directly reduce their retirement spending by about $23,000 per year.
This number might seem high, but $23,000 represents the average mutual fund fee in Canada. With an average fee of 2.3% per year, a retirement portfolio will not be able to support the same level of spending as a retirement portfolio with fees of just 0.25% per year.
Fees are always important, but when investing after retirement the impact becomes much more real. Investment fees directly impact how much income we can generate from an investment portfolio.
Why pay $23,000 in annual investment fees when that could represent an extra vacation or two each year?
Less Complexity Is Better
When investing after retirement less complexity is often better (not less diversification, diversification is always good!).
We often work with DIY investors who are invested in individual stocks. These individual holdings may make up a small, medium, or large portion of their portfolio. There may also be some low-cost ETFs for added diversification. These portfolios are great but they are sometimes very complex to manage.
For some DIY investors, managing their portfolio is a hobby. They enjoy spending multiple hours per week researching new companies or keeping up to date on the companies they already own. They don’t mind tracking adjusted cost base on dozens of individual investments or making many buy/sell transactions.
But when investing after retirement this additional complexity can easily become a burden. At some point in time it may be necessary to reduce the complexity in an investment portfolio and make things easier to manage.
This point in time will be different for everyone but it’s important to plan ahead, especially for the increase in fees.
For investors with a complex portfolio of individual stocks and/or ETFs we often build in an increase in investment fees into their retirement projections. This may happen later in retirement, around age 75 or 80, but it’s important to anticipate this added expense.
Adding in a fee increase into a retirement plan provides investors the freedom to move to a less complex (but still low-cost) investment option in the future. This might be an all-in-one ETF, or a robo-advisor, or even a low-cost portfolio manager. Adding a fee increase will allow them to move to a less complex investment portfolio without impacting their long-term projections.
Investing After Retirement
Investing after retirement doesn’t have to be complicated. Fees are one important consideration, as it directly impacts our ability to create retirement income. A large annual investment fee will eat directly into how much income we can generate from an investment portfolio.
Similarly, choosing the right asset allocation is important as well. Being too conservative can increase certain types of risk in retirement. Its best to choose an asset allocation in line with your personal risk profile and past investment experience.
Lastly, make sure to anticipate changes in your ability to manage a complex investment portfolio. Planning to reduce complexity in the future is a good idea for DIY investors with a portfolio of individual stocks and bonds. This complexity can make it difficult to manage an investment portfolio later in retirement and can make transitioning investment management to a spouse even more challenging.
Investing after retirement should be low-cost, easy to manage, and let you sleep at night.
Financial planner, personal finance geek and founder of PlanEasy.