“Portfolios” is an ongoing series that discusses various asset-allocation options. This issue, Investment Executive speaks with Daryl Diamond, principal at Diamond Retirement Planning Ltd. in Winnipeg; Don Fraser, vice president of Connor Clark & Lunn Private Capital Ltd. in Toronto; investment advisors Mardi Matthews and Jane McCutcheon and branch manager Paul Tisdall at Cottage Country Group, a branch of Worldsource Securities Inc. , in Ontario’s Muskoka region; and Randall Takasaki, investment advisor at HSBC Securities (Canada) Inc. in Vancouver.



A retired couple, both partners aged 65, have $250,000 in an RRSP accumulated by the husband, who was a self-employed consultant, as well as $250,000 of taxable assets. The wife, who worked as an Ontario government employee, has a pension income of approximately $25,000 a year indexed to inflation.

The couple would like to travel while they are able. Their children are self-sufficient, so the couple believe they will need about $50,000 in annual pre-tax income (all figures are in today’s dollars unless otherwise stated) in their retirement years to accomplish their goals. They want to be able to count on that much income until they are 90. So far, they have invested primarily in bonds and a few blue-chip equities, with a relatively low tolerance for risk.

The couple’s goals are more than achievable. Diamond says they will have $55,000 annually just from the wife’s pension and their Canada Pension Plan and old-age security benefits. If they don’t spend their investment income, they would have an estate of about $2.2 million in 2031 dollars when they reach 90. He is assuming an average 5.8% return a year after fees with annual inflation of 3%.

Takasaki believes the $50,000 goal is not only reasonable, but could be generated from investment income, pension income, CPP and OAS without withdrawing any capital. The portfolio would grow with inflation, reaching about $2.1 million in 2031 dollars when they turn 90. He is assuming an annual return of 6.75%, with inflation averaging 3% a year.

The others looked at how much the couple could spend without running out of money. Matthews, McCutcheon and Tisdall project the couple could spend $65,000 a year to age 95, assuming a return of 6% a year and 3% annual inflation. Matthews notes there is a 30% chance that one or both will live beyond age 90.

Fraser thinks the couple could spend $63,000 a year after taxes to age 90. He, likewise, assumes 6% annual return and 3% inflation, but assumes the wife’s pension is reduced by the amount of her CPP entitlement, which is often the case when pensions are fully indexed to inflation. He adds that they could spend $50,000 a year after taxes and still have $800,000 in assets in 2031 dollars at age 90. Or, they could spend $38,000 annually, which he calculates as the after-tax equivalent of their $50,000 pre-tax goal, and have $1.4 million at age 90.

In terms of structuring their portfolio to meet these goals, Matthews recommends a 50% equities weighting; Takasaki agrees; and Diamond and Fraser recommend an equities weighting of about 45%. Not surprising, everyone would concentrate the equities in the non-registered account.

Takasaki and Matthews would keep 5% in cash for emergencies, whereas Fraser would keep 2%. Diamond recommends placing 12.5% of the non-registered assets into cash for emergencies and 20% of the RRSP assets into cash or GICs, for a total cash position of about 16% of the portfolio. The couple will begin immediately withdrawing $17,000 a year from the RRSP, which, Diamond assumes, they won’t need. That amount will be added into the investment portfolio. But, he says, it is necessary to start RRSP withdrawals right away to keep the husband’s income in the lowest federal tax bracket throughout the next 25 years.

As for account type, Takasaki recommends a transaction-based account in this case, because of the expected low asset turnover. It would be cheaper — at probably less than 1% of assets — than a fee-based account. He would use a combination of individual securities and mutual funds.

Diamond also suggests a transaction-based account. He would use mutual funds or pooled funds for the fixed-income portion of the RRSP, with fees averaging 1.25%, and corporate-class mutual funds for the equities in the non-registered account, for which fees would be 2%-2.5%. The higher fees for the corporate-class funds are justified by the greater tax efficiency through deferral of capital gains. That keeps taxable income low, preserving tax credits and lowering pharmacare deductibles and health-care per diems, for instance.

@page_break@Both Fraser and Matthews recommend a fee-based account, as well. Fraser would choose a discretionary account, whereas Matthews would opt for a non-discretionary account. The fee in both cases would be 1.25% and would be reduced if assets are more than $1 million. Fraser, who would mainly use Connor Clark & Lunn pooled funds, would charge for trades. In Matthew’s case, the fee is all-inclusive, with trading, trailer, commission and trustee fees absorbed. She would invest in individual securities, options, exchange-traded funds and F-class mutual funds.

Foreign equity is considered important to diversify the risk geographically, but the advisors differ on how much is needed. Matthews suggests 50% of the equities be foreign; Diamond, 45%. But Fraser believes only a third needs to be foreign, and Takasaki’s neutral position is 30%. At the moment, Takasaki is only 20% foreign because the fundamentals are so favourable for Canadian equities. Matthews would buy some individual foreign stocks, as well as some U.S. ETFs and global equity funds; Diamond and Takasaki would use mutual funds; and Fraser would use pooled funds.

On the Canadian equities side, Takasaki and Matthews would buy individual stocks as well as mutual funds, while Diamond would stick with pooled and mutual funds. Fraser would use pooled funds.

Tisdall would also write options for some of the Canadian and foreign individual stocks. The Cottage Country Group writes both call and put contracts. And these can enhance returns considerably, says Matthews. For example, if the advisory group bought a stock, such as BCE Inc., for $27 a share, it might write a call for $29. If the stock reaches $29, the clients get the appreciation as well as the premium paid by the call’s purchaser and any dividends earned while holding the stock.

Matthews notes that options can be sold on some ETFs and income trusts, as well as on stocks. Fraser says Connor Clark & Lunn pooled funds also use a wide variety of options.

Everyone interviewed would include income trusts in the equities portion, generally to about 10% of the overall portfolio.

Fraser and Diamond would get full sector diversification through the pooled and/or mutual funds they choose. Both Matthews and Takasaki provide some sector diversification through mutual funds and would also diversify the individual stocks they purchase by sector, although they wouldn’t worry about exactly matching the benchmark weightings. Takasaki has a 20% cap on any one sector and 10% on any one stock.

Matthews says that in a retirement portfolio, it’s a good idea to overweight less volatile, dividend-paying sectors, such as utilities and consumer staples, and underweight more volatile ones, such as information technology.

In terms of style, Matthews suggests overweighting value management for Canadian equities and growth management for foreign equities. This allows the couple to take advantage of the favourable tax treatment of dividends on Canadian stocks.

Fraser would get style diversification in the pooled funds he uses for Canadian equities, including large- cap value, large-cap GARP (growth at a reasonable price) and small-caps. (All foreign equities are managed GARP-style.) Takasaki looks for style diversification among the mutual funds he uses for Canadian equities but doesn’t worry about it with foreign equities. Diamond is less concerned about style than about consistent returns and how effectively managers have weathered downturns relative to their peers.

Fraser would use pooled funds, yet again, for the fixed-income portion. Takasaki includes financial services company preferred shares in his fixed-income portion; these would account for about 10% of the overall portfolio. The rest would be in a bond ladder, going out 10 years. Matthews would also build a ladder that would eventually go out 20 years; it would be built through dollar-cost averaging.

Diamond’s 55% fixed-income portion would be invested 20% in cash or GICs, 25% in a monthly income fund, 25% in Canadian bonds, 15% in real-return bonds and 15% in global bonds, with the last three in pooled or mutual funds.

Takasaki says he would probably not recommend alternative investments for this couple because they appear to be relatively unsophisticated investors. Matthews wouldn’t recommend alternative investments initially, but would educate the clients so such investments could be a future consideration. She says stock and bond returns tend to be quite correlated, so it would be a good idea to look at some exposure to hedge funds, for example.

Fraser, likewise, wouldn’t recommend alternative investments at the beginning, but might suggest up to 5% down the road. And Diamond doesn’t see any need for alternative investments for this couple. IE


Retirement projections are necessary for financial planning but are inherently uncertain. Because of changing market, taxation and personal conditions, assumptions and projections must be continually reviewed and updated.