Recently I read an article in The Globe and Mail suggesting relying on stocks for retirement income is a risky strategy. Say what?
Prem Watsa, the CEO of insurance and investment giant Fairfax Financial Holdings Ltd., stated “What happens with these low interest rates is that you have people searching for yield and taking risks that they may not understand, that they may not know.” Partially true. And sure, the world could be hit by another massive financial asteroid/downturn but I’m not about to run into a cave with cans of soup or a bunch of matches. Everyone has a bias when it comes to investing and I think Watsa has some as well. My understanding is Watsa has a history of buying put options and derivatives to bet against market movements. He is the founder and CEO of a major insurance company. His bearish calls are probably not a surprise.
Back to the article I’d like to think this particular case study was taken out of context. The article further stated: “…a friend’s 90-year-old grandmother was relying heavily on dividend-paying common shares for retirement income.” If a 90-year-old can live off dividends in retirement that means this investor must have a decent amount of capital invested. While complicated this is a great problem to have. Heck, living to age 90 is a great thing.
I get the fact that the equity markets are/have been a mess in the short term, the price of oil is causing heartburn for people, and we’re probably not going to see real returns from bonds above 2% for another few decades. However, to say that owning stocks in retirement is risky seems like fear mongering to me.
This why I side with Globe and Mail personal finance columnist Rob Carrick – who makes a case for a “bucket” approach to fund retirement, something I’m going to employ in some shape or form in another decade or so. In fact, I recently wrote about that here.
I will likely employ something like the following:
- Treat any income from our pensions like it is: fixed-income. It is my hope that most of our fixed-income will pay for basic retirement expenses (all food, all shelter and all clothing).
- I intend to keep about one-year worth of living expenses in cash savings.
- After the one-year cash fund is established I believe the rest of the portfolio will be split this way:
- 50% invested in dividend-paying stocks from Canada and the U.S. (about 30-40 stocks in total). We will use the dividend income generated from these investments for living expenses, and
- 50% invested in a couple of low-cost, diversified, equity ETFs (like VTI) that invest in thousands of stocks. We will spend the distributions from these investments and draw down the capital over time.
These are some preliminary thoughts about how to fund our financial future – and as you can see – avoiding stocks is not one of them. The financial plan we have is to save and invest in stocks for income and long-term growth. We strive to keep our investing costs in stocks as low as possible for as long as possible. After investments are made every month we just live our lives with the money that is leftover and do what we please, ignoring claims the financial world is coming to an end.
Are stocks a risky play in retirement? What do you think?