Drawing from your portfolios? Worried about the next pullback? What can you do to minimize the impact of a correction?
Markets have been on an upward trajectory since late-March and most portfolios currently sit flat or slightly positive for the year. This is quite the turnaround from just a few short months ago.
However, headwinds remain. Renewed infection waves, policy exhaustion, and permanent economic damage are all short- and medium-term risks that markets have not fully priced in.
If you are already drawing down your portfolio and you are concerned about what the next few months or years may bring, here are a few strategies for you to consider:
Follow the plan: When we meet with our retired households, we always perform a cash flow exercise to determine what a sustainable drawdown is for a portfolio. The analysis incorporates a rate of return of projection that is conservative relative to historical performance and factors in negative return years. If you withdraw less than the upper limit of what is shown in the cash flow analysis, then you have a good chance of your portfolio outliving you.
Reduce your monthly withdrawal: Are you spending less these days, but still drawing the same (possibly taxable) income from your portfolio only for these funds to accumulate in your bank account? If so, consider reducing your monthly withdrawal. This preserves more of your funds in your tax-sheltered account to help you with your future cash flow needs.
Reduce your RRIF Minimum Annual Payment (MAP): Anyone with a RRIF account must draw a prescribed minimum each year, usually in the 5-15% range. One of the provisions of the federal government’s aid package was a special 25% reduction of the 2020 MAP. We have written about this before and many of you have already taken advantage of this option. If you wish to reduce your 2020 MAP, please contact us.
Replenish your cash wedge: For most of our retired households, we place the equivalent of 1-2 years’ worth of cash flow in a safer cash or income investment. This way, your short-term cash flow needs are not exposed to market volatility and you’ll never have to sell any of your investments at a low point in order to pay for living expenses or to make the minimum annual RRIF withdrawal.
This is called the “cash wedge” strategy and is an important retirement planning tool. The Globe & Mail wrote about it a few months ago (for subscribers only, but we can share a copy with you).
If your cash wedge balance is currently low, this is a great time to replenish it and secure the equivalent of one, two, or even three years’ worth of income depending on your overall market outlook.
Draw your lump-sums now: If you contact our office to say, “I’m going to need X dollars for a project in the next year or so, when’s the best time to take this from the portfolio?”, our answer will likely be “right now”.
This is less about timing the markets, and more about applying a philosophy of selling from a position of strength, rather than weakness. We do not know what next month or next year will bring, but we do know that markets are at a short-term high. Drawing sooner rather than later is the prudent move right now.
Pre-retirees: The above information applies to you too. Normally, we reallocate your portfolio to a more conservative mix in the years leading up to retirement. With markets at or close to their all-time highs, this is a great time to transition your portfolio. You will end up taking profits from your equities, reducing portfolio risk, and securing your upcoming retirement cash flow needs.
If applicable, many of these ideas will be addressed at your next annual review. However, we may contact you ahead of time if we feel your portfolio requires more immediate attention. Of course, feel free to contact us immediately if you want to ensure these ideas are properly implemented in your portfolio.
Don’t hesitate to contact us with any questions around these strategies and how they may be relevant to your situation.