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How to preserve and protect that nestegg

Given the recent market volatility, it seems prudent to revisit the age-old question about portfolio asset mix for those who are retired.
nest egg

Given the recent market volatility, it seems prudent to revisit the age-old question about portfolio asset mix for those who are retired. Looking back at some articles published over the past few years, I see some that talk about “what others do,” pointing specifically to Warren Buffett or the Harvard University Endowment Fund. Advice from these sources would suggest that you should do what the “smart money” does. The logic is that since these two investors have been so successful, you should follow their example. But I disagree. Here’s why.

The answer is simple. You are not Warren Buffet and you are not Harvard University Endowment Fund. You are you. Thus, your portfolio asset mix should be a reflection of who youare, at the present stage in your life, given your various objectives and your overall financial picture.

I also disagree with the simplistic advice to follow the “smart money,” because many of these analyses and comparisons ignore the most important component of your portfolio and your retirement income picture: taxation.

The overwhelming impact of tax

Tax is typically life’s single greatest expense. According to the annual Fraser Institute’s Canadian Consumer Tax Index 2015, a Canadian family earning $79,010 in 2014 would have spent 42.1% of combined income on tax from all levels of government compared with 37% on shelter, food, clothing combined. Thus, we have found that managing taxation can have a far greater, positive impact on your income and retirement picture than the rate of return in your portfolio. Therefore, your unique tax situation must be one of the key decisions that ultimately influences your portfolio asset mix.

This is where the discussion about portfolio asset mix begins to get really interesting. You see, when you minimize the tax bite when withdrawing money from your portfolio, then you simply don’t need to withdraw as much. This helps to preserve capital. Next, if you don’t have to withdraw as much money to meet your income needs, then you don’t need to take as much risk in your portfolio to achieve your required investment return.

Efficiency first, allocation second

If you are then also able to have a portfolio with a below-average fee structure, this too will mean that you don’t have to take as much risk to achieve your required investment return.

Only once these things are in place should your attention move to determining your portfolio asset mix. If you have already achieved great efficiency, then your overall asset mix does not need to be too aggressive. In fact, your asset mix can be quite conservative. Interestingly enough, some studies have shown that a more conservative asset mix is more likely to achieve your rate of return expectations over time than a more aggressive asset mix simply because the more a conservative portfolio has fewer fluctuations over time. Managing volatility is extremely important, especially in a retirement portfolio, as we have seen over this past year, and particularly over the past month or so.

So what is the right asset mix for retirees? It depends on your income needs, your other sources of income, your tax picture, and the fees you are paying on your investments. Once you have these things organized efficiently you can address the question of asset mix. Since your situation will always be different from Warren Buffett and Harvard University, you should never try to be like them. Ultimately, it is yourfinancial plan that should drive the asset mix of your portfolio.

Courtesy Fundata Canada Inc. © 2015. Doug Nelson, B.Comm., CFP, CLU, CIM, is President of Winnipeg-based Nelson Financial Consultants. This article is not intended as personalized advice.