Your Wealth Advisor - Canada

The technical dilemma: using a balanced portfolio (40% stock, 60% fixed income) for income in retirement is way more risky than we have been lead to believe. Using a heavier allocation to equities can be fatal to the portfolio.
 
Typical planning practices assume “average growth" rates for the entire time horizon. As a result many advisors and clients mistakenly think that an individual investor is likely to experience “returns” consistent with long term historic averages.

Further, typical planning practices also assume “average inflation" rates for the entire time horizon. As a result many advisors and clients mistakenly think that an individual investor is likely to experience “inflation” consistent with long term historic averages. 
 
Unfortunately it won’t turn out that way. Actual results will in fact vary widely. Depending on when you decide to commence drawing income your actual results will be higher or lower than the averages. Sometimes it will be much higher but of greater concern are outcomes that are much lower than the averages.
  
Losses over a few years at the outset can ruin a retirement plan because of the time value of fluctuations. You don’t necessarily even have to experience losses for the plan to go badly wrong. If you just under-perform your plans forecast “average returns” for 4 or 5 years early on, you will likely never catch up with the original retirement projection.
 
Advice for real people: With a distribution portfolio if you don’t consider the real cost of “financing” the time-value of fluctuations, you are making a big error. An error that might turn a retirement dream into a nightmare. Something a good Advisor is supposed to prevent. You have to allow for the risk of bad or unlucky outcome, just like an engineer builds in protection to their bridge designs. Engineers don’t use “average wind speeds”, they design the bridge to withstand even the unlucky outcomes like a hurricane.
 
We need to do the same in our retirement income strategies otherwise we are just fooling ourselves and the clients.

We need to go from what are the risk and returns, and talk something people understand: consumption, spending and lifestyle.

In retirement, people who might want the risk free and hassle free utility of GICs and the inflation protection of RRBs would do well to consider an inflation-indexed life annuity instead. It works like your MP’s inflation-indexed pension plan and will provide a higher cash flow (retirement income) than you could draw from ladder of RRBs.

For de-accumulation, using an inflation-indexed life annuity to make-up any income shortfall is a simple, safe and appropriate strategy for anyone. It is also guaranteed for life.