Much is written about investing during your working years, but surprisingly little about investing in retirement. How much money should you keep in stocks after retirement? One rule of thumb says the percentage of equities in your portfolio should equal 100 or 110 minus your age, meaning someone turning 70 would have just 30 to 40 percent invested in stocks.

This makes sense given that your investing time frame is no longer considered ‘long-term’, plus you still have some exposure to stocks to protect against longevity risk – the risk of outliving your money.

How much money should you keep in stocks?

But forget conventional wisdom for a moment. Before we decide how much of your portfolio to dedicate to stocks we first need to determine your retirement income needs.

That starts with the type of lifestyle you want to live in retirement and how much money that will cost on an annual basis. Ideally you already have a budget worked out or you will soon after settling into your first few years of retirement.

How much will you receive from a workplace pension? CPP and OAS? Any income from a rental property, a hobby, or other passive pursuit?

The difference will have to be made up from your savings. To use an example let’s say your lifestyle requires $48,000 per year in retirement and between your workplace pension and government benefits you receive $30,000 per year. The remaining $18,000/year must come from your savings; through your RRSP/RRIF, TFSA, cash and/or non-registered investments.

As a diligent saver you’ve managed to put away $400,000 between cash savings and your various investment accounts. Using a safe withdrawal rate of 4 percent that means you can take out $16,000 in year one – just short of your income goal. You could push your withdrawal rate to 4.5 percent to get to your desired $18,000, or cut back slightly on your spending and reduce your lifestyle.

Here’s what I’d do:

Divide my portfolio into three buckets. The first bucket would contain $18,000 in cash – the exact amount needed to meet my spending goal. The second bucket would contain $90,000 and be placed into a 1-5 year GIC ladder – split into five $18,000 tranches. The third bucket would contain $292,000 in stocks – preferably low-cost broadly diversified ETFs.

Related: Buckets and Glidepaths – What to do with your money after retirement

If you’re keeping score, that’s 73 percent of the portfolio allocated to equities, a far cry from the traditional rule of thumb when investing in retirement.

After the first year I’d replace the cash from the first bucket with the mature 1-year GIC, and then withdraw $18,000 from my stock portfolio to replace the GIC. Rinse and repeat.

Age Bucket #1 – Cash Bucket #2 – GIC ladder Bucket #3 – Stocks
65 $18,000 $90,000 $292,000
70 $19,485 $97,434 $253,870
75 $21,096 $105,482 $207,477
80 $22,839 $114,195 $151,033
85 $24,725 $123,628 $82,362
90 $26,768 $133,839 $0

Using a conservative annual rate of return of 4 percent on my stock portfolio and 1.6 percent return on my GICs, I could expect my entire $400,000 nest egg to last until age 95 with a modest increase in spending to account for inflation.

The stocks would be depleted by age 90 and I’d be left with five years worth of spending safely remaining in GICs.

This scenario generously assumes that my spending won’t decrease after age 75, which is typical among retirees barring any unforeseen deterioration in health. Plus, I wouldn’t completely run out of money at age 95 as my pension income would have been steadily rising with inflation.

Final thoughts on investing in retirement

As you can see from this example your stock allocation can still remain relatively high in retirement as long as you have a solid retirement income plan in place.

And since you’re only withdrawing a small portion of your portfolio each year to fill up bucket number two (GICs) you can still keep a long-term view in mind when it comes to the stock market.

But what happens if the stock market tanks one year? Well, you could postpone your $18,000 withdrawal that year knowing that you’ll still have one or two GICs maturing to replace your cash needs in bucket number one. Then, when times are good again, you can make a larger withdrawal from your stock portfolio to refill the GIC buckets.

You can also apply what author Fred Vettese calls a dynamic spending approach where you spend more when your financial situation improves (i.e. stocks perform well) and less if your situation worsens.

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