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What should your investment mix be when you retire?

The key principle of investing is determining the composition of your portfolio based on your risk preference. The life-cycle investing theory dictates your asset allocation should shift as you age from more to less risky investments. The theory is based on the knowledge that when most people retire, they will rely on income from their portfolio. Typically, the closer your retirement date becomes, the less risk averse you become. You need certainty that your income will not be disrupted by a large drop in the stock market.

A good rule of thumb to determine the right equity mix in your portfolio is to deduct your age from 100. At age 65, for instance, stocks should make up 35% of your portfolio. But this rule only applies to people who will rely on their portfolio for income. If you have other sources of income to fund your lifestyle, you can continue to hold riskier investments as you age.

Let’s assume, for example, that you are a 60-year-old physician, ready to retire. You have $1.5 million in both your and your spouse’s RRSP, a $1 million investment portfolio, and 2 rental properties generating $5,000 of monthly income. You can live comfortably on the RRSP income and rental income. You don’t expect any significant draws from your portfolio.

Currently, you have all your funds outside your RRSPs invested in equities. Your financial planner is recommending you move to a conservative portfolio mix of 70% bonds and 30% equities. With that mix you can expect to earn historical average returns of 10% for stocks and 5.5% for bonds. By the time you are 80, your portfolio will have grown from $1 million to $4.1 million (excluding income taxes). On the other hand, if you stick to a portfolio with 100% stocks, in 20 years the portfolio will have grown to $6.7 million, $2.6 million more. This is a 60% increase over the conservative portfolio.

Your children will be very happy.

The bottom line is that the portfolio mix in your retirement should not be based solely on age. It is more a question of assessing how dependent you are on your investment portfolio to fund your personal and living expenses.

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