After many gruelling decades in the workforce, the process of finally hanging up the skates is seen by many retirees as a relatively simple one.
Many newly minted retirees follow a similar script that involves cashing out of the stock market and gravitating toward less risky or risk-free securities, most notably bonds, bond ETFs, or various blends of bond and stock mutual funds.
Once you’re retired, you can’t afford to take the same risks you could when you had a paycheque to collect on a regular basis. As such, many retirees suddenly become allergic to taking on any form of risk. Ironically, it’s this sudden risk aversion that may be the most significant risk to one’s retirement over the long haul.
Why?
Life expectancies are continuing to surge, and if you’re living past your 80’s, health issues and other expensive mishaps are bound to happen, even if you’re one of the lucky ones. Not only do retirees need to combat the wealth-decaying effects of inflation, but they also need to be ready for potentially sizeable contingent expenses down the road.
If you’re fully invested in short (or goodness forbid) long-term government bonds with yields as low as they are, you’re barely going to make ground over inflation. It’s a tight spot for today’s retirees to be in, as the days of stock-like returns minus the risks are all but over.
What’s a retiree or near-retiree to do?
Stay invested in the market with a percentage of your portfolio that you’d be comfortable with.
When determining the ratio of stocks to bonds, some retirees opt to go with a rule of thumb, such as subtracting one’s age from 100 to get the percentage of a portfolio that should be devoted to equities. Such a rule of thumb balances growth, safety, and income quite well.
However, unless you’ve got a massive multi-million-dollar nest egg, you might want to lean a bit more toward the equity side in your early retirement, so your nest egg can continue to grow while supporting your lifestyle.
Unfortunately, there’s no one-size-fits-all percentage for how much equity exposure is optimal, and while it’s always important to mitigate risk in retirement, there are stocks out there like Fortis (TSX: FTS)(NYSE: FTS) that act like bond proxies or bond alternatives.
Safe blue chip dividend growth stocks can pay you more than bonds do, and over time, they are far less risky than most other fixed-income securities.
Fortis is my favourite bond proxy because it’s a highly regulated business with monopoly-like traits within its markets of interest and it’s got an attractive foundation in U.S. markets, including Tucson, Arizona and Novi, Michigan. Of course, the company has a wealth of Canadian assets, but it’s the U.S. ones, I believe, that gives the utility the edge over many of its domestically overexposed peers.
While many utilities have durable competitive edges in their markets of interest, what sets Fortis apart from its peers is its massive transmission line network, which, like railways, are notoriously difficult to construct and nearly impossible to replicate once a community is already being served.
Fortis has high barriers to entry, and unlike Hydro One, has a reliable growth outlet that can fuel 5-6% dividend hikes every single year.
Fortis is all about predictability, and if you’re a retiree who desires growth without taking on excessive risk, look no further than the name and its bountiful 3.3% dividend yield. It beats bonds, annuities, and all other “risk-free” assets by a country mile and may be a less risky bet for those retirees who can expect to live 30+ years after retiring.
Running out of money in retirement is every retiree’s greatest fear, and with “growthy” names still in your portfolio, you can put such fears to rest.
