Investing In Retirement: How Much Money Should You Keep In Stocks?

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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20 Comments

  1. The Curious Frugal on April 9, 2018 at 6:11 am

    Dynamic spending to me makes so much sense. If you’re aware of your finances and continue to pay attention in retirement, why not adjust your spending accordingly. Being a flexible person financially seems like such an important trait to cultivate. It doesn’t have to feel like a hardship to become a bit more frugal when times call for that, and then relax the reigns a bit when the situation improves. Though I’m not close to retirement yet, I’m enjoying this series of posts to get me thinking about that future.

    • Echo on April 9, 2018 at 6:34 am

      Thanks! The other point that I should have stressed is that we often equate withdrawals with spending and it doesn’t have to be that way. So, for example, you could tuck $5,500 away into your TFSA if you don’t *need* to spend that money one year.

  2. Malcolm Palmer on April 9, 2018 at 7:03 am

    More recent research has found you need to increase not decrease your equity position as you go further into retirement, otherwise you are more likely to run out of money.

    • Echo on April 9, 2018 at 10:17 am

      @Malcolm – yes, the rising equity glidepath in retirement. The research suggests that your lifetime stock allocation path should be U-shaped, starting out with a high percentage (say 90%) during your working years, then gradually tapering off as you get closer to retirement (say 30% at retirement), and finally rising again to around 60% in the 15-20 years after retirement.

      The argument against this approach is that perhaps someone in his or her late 70s/early 80s would have difficulty managing the higher allocation to equities after getting used to stocks making up just 30-40% of the portfolio for a good decade or more.

  3. Nelson on April 9, 2018 at 7:39 am

    I’ve always thought that a retiree’s risk tolerance should dictate their equity portfolio. Many retirees are a little obsessed with leaving something for the next generation, and thus live in fear of a market correction happening at the wrong time.

    Using the same logic, I can understand why someone in their early 60s would move to a very conservative portfolio right before they plan to retire. Capital protection becomes the most important thing, not gains.

    Big fan of dynamic spending, too. It’s easy to cut back on a few expenses if things are tight.

    • Echo on April 9, 2018 at 10:22 am

      @Nelson – Risk tolerance plays a significant role. The only caveat being longevity risk and your portfolio not being able to generate high enough returns to sustain your income. For risk-averse retirees who have enough money to live on from their pensions and government benefits, you could argue there’s no need to take additional risk in their portfolio and so their allocation could be near-zero.

      At that point it’s okay to say you’ve won the game and there’s no reason to keep playing; especially if a volatile market gives you anxiety.

  4. Gab on April 9, 2018 at 10:00 am

    “One rule of thumb says the percentage of fixed income 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.” did you mean stocks or fixed income? 🙂

    • Echo on April 9, 2018 at 10:22 am

      Sorry, yes that should have read “stocks”. It’s been fixed.

  5. Gary @ Super Saving Tips on April 9, 2018 at 11:06 am

    I have to agree with Nelson that risk tolerance plays a big role. 73% in the stock market is a pretty large bet when you have a shorter time horizon. That being said, investing in some index funds, or dividend stocks, during retirement makes sense to me.

  6. Keith C. Cowan on April 9, 2018 at 2:28 pm

    I think this article really underscores that individual situations need attention and that ROTs do not apply. In my case, I have been retired 15 years and the cumulative gains in stocks have given us new flexibility to maintain a high equity share for our heirs.

    • Echo on April 9, 2018 at 2:45 pm

      @Keith – You’ll get no argument from me there. I would hate to devise a blanket strategy just because it worked for retirees over the last decade of continuously rising markets.

  7. Eng Phys on April 9, 2018 at 2:39 pm

    Usually you’d want about 50% stocks/50% bonds or GICs in retirement.
    I would make up the difference with a bond ETF and at the end of the year, I would fill the GIC bucket with whichever did better, stocks or bonds and rebalance.
    Your method of postponing filling up the GICs in the case of a market drawdown is just market timing. Having bonds and rebalancing would be more reliable

    • Echo on April 9, 2018 at 2:54 pm

      @Eng Phys – The approach I described essentially gives you five years to weather the storm of a bear market by having the ability to cash-in maturing GICs each year. You need some rules around what determines a “bad year” for stocks. If -10% then withdraw from GIC #1, for example.

      A 50/50 split sounds reasonable, but your allocation should really be based on your risk tolerance and ability to generate the desired income in retirement.

  8. Keith C. Cowan on April 9, 2018 at 4:12 pm

    TB Bank’s total return for the last ten years has been 18.7% per year. That and the others have created a buffer for us, enabling us to take more risk going forward.

    One of my fixed return investment was a convertible from NFI. 6.25% per year for five years plus a conversion privilege at $10 for a $55 valued stock at maturity. This has also given me more flexibility going forward…

  9. RICARDO on April 10, 2018 at 8:03 am

    I like the 4% rule.
    I haven’t figured out, yet, how to do it when the government mandates 4% @65 and increasing each year thereafter. At 71 it is 5.28%
    If you comes across a way to do it let me know.
    I am slowly building a GIC ladder as cash becomes available. Hate doing it though as the rates being paid are miniscule. Just need the “cash” to ride out the ups and downs of the stock market.
    67 years of wisdom right now and 99% in stocks.

    RICARDO

  10. Garth Sproule on April 10, 2018 at 8:09 am

    Dirk Cotton wrote a nice piece on the pros and cons of “bucket strategies”…

    http://www.theretirementcafe.com/2018/03/the-pros-and-cons-of-bucket-strategies.html

  11. Kevin on April 13, 2018 at 8:41 pm

    Ricardo, the government’s withdrawal rates are what you have to withdraw from your RRIF each year, not what you have to spend. If you only want to spend 4%, spend that. Take what’s left over from your RRIF withdrawal and put it in a TFSA or into a taxable account. When it you withdraw it later from one of those accounts, you won’t pay tax on that amount again.

  12. RICARDO on April 15, 2018 at 1:31 pm

    @ Kevin
    Thanks for the comment Kevin.
    I am quite aware that I do not and am not obliged to spend the whole amount of withdrawal from a RIF and that I could re-invest left over amounts in to a TFSA if there is enough room or even a non-registered account.
    What bugs me is that no seems to say that the mandated withdrawal rates from your RIF will eventually bring it to a big “0”. Just about every article I have ever read says keep withdrawals to 4% and you are fairly sure you will not run out of money.
    Why not just be up front and say that the 4% rule applies to non-registered accounts as well as the TFSA and that RIF withdrawals are mandated by the government. To that extent then the individual can contribute to a TFSA or even invest in a non-registered portfolio if funds permit.
    Just would like to see upfront articles telling it like it is. Not putting all the information on the table with rose coloured glasses is of no help to the un-initiated.

  13. Keith C. Cowan on April 15, 2018 at 2:17 pm

    The rules are provided by the government to get their taxes. If they could get away with 10%, they would! There is no 4% rule.

  14. john on December 28, 2018 at 8:51 am

    bucket 3 Would it include bonds or just stocks

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