The years leading up to retirement require a change in investment strategy. During these years, the focus of retirement planning should be on positioning one’s portfolio for capital preservation and income. It’s not the time for taking too much risk, as these are the years to put an income-producing strategy into place – one that will take over as your primary source of income as your employment income ends.
Here are some key considerations on how to manage your investment portfolio now for a financially healthy Canadian retirement later.
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Retirement: Stocks vs bonds
During this time period, a rebalancing of your portfolio of retirement investments should focus on including more bonds, or fixed income, to your mix. These investments carry lower risk but also lower upside, and that’s fine, as the focus in these years needs to be preservation of capital and reliable income.
A blend of secure corporate and government bonds that pay more than the inflation rate, with staggered maturities, ensures a steady and reliable stream of interest income in one’s retirement years.
Growth vs income in your retirement stock portfolio
Let’s move on to the equity, or stock, portion of your retirement planning. For this portion of your portfolio, the key is to shift your focus once again. An adjustment in the weighting of income-producing stocks in one’s portfolio is essential to build up that retirement income. Simply put, in the years leading up to retirement, the focus should be on accumulating dividends. Shifting your portfolio away from the higher-risk growth stocks in favour of safe and secure dividend stocks can make this happen.
Fortis Inc. (TSX: FTS) is a strong example of a Canadian dividend stock that can support an investor in retirement. In fact, Fortis’ dividend has been one of the best examples of a retirement stock, as retirees have been able to count on its reliability for over 50 years. Furthermore, Fortis has increased its annual dividend every year for the last 52 years. Looking ahead, Fortis expects to grow its dividend by 4% to 6% until the year 2030.
Growth stocks still have their value for those nearing retirement, but stick to blue chip companies with strong competitive advantages and balance sheets. Also, limiting the weighting of these stocks will limit your risk and better preserve your retirement capital.
Sector diversification
Maintaining exposure to a diversified range of sectors within your retirement portfolio also helps spread out and lower one’s risk. Remember, one of the primary goals in your retirement planning should be reducing investment risk and preserving capital.
Diversification allows your portfolio the greatest chance of success in all markets, as when one sector is struggling, a different one may be thriving. For example, along with utility stock Fortis, one might also include stocks from sectors such as financial services, energy, and consumer staples. This provides a well-rounded, safety-focused exposure profile.
Within the banking sector, Toronto-Dominion Bank (TSX: TD) is a top dividend stock for your retirement plan. Its current dividend yield is only 2.6%, but it has a strong dividend growth track record as well as a history of resilience.
The bottom line
Canadian retirement planning is something that includes considering taxes, inflation, and expenses, as well as pension plans and investments. For a financially happy retirement, income and capital preservation are the goals to strive for.
