How to Stretch Your Investments for a Longer Retirement


December 21, 2023


December 21, 2023


December 21, 2023

Should you shift your investment strategies post-retirement?

The saving and investing strategy you use to accumulate money during your working life is different from the one you use to manage your resources in retirement. Understanding the differences, and adapting your approach, is even more important in an era of very low interest rates. After inflation and taxes, many fixed income investments are a breakeven proposition at best. That means looking elsewhere for returns that meet your objectives.

How do pre and post-retirement investing strategies differ?

During your working life, your strategies are designed to accumulate assets. So, you’re looking for places where you can get maximum growth over a long period. Most investors look at stocks, mutual funds and ETF’s. Capital appreciation is the primary objective. In retirement your goal changes to preserve what you have and find ways to generate cash to live on.

In your accumulating phase, a broad stock market index ETF, or an equity mutual fund as examples, could be a great way to go. Your assets should grow over the long-term. For Canadian stocks, the average returns have trended a bit lower, but the trend is the same. So, stocks could be an attractive place to be.

As you move into the stage in life where you are drawing down your assets, cash flow becomes important. In other words, generating enough money from your savings to get a monthly amount you can live on.

So, the strategy you have been using doesn’t work. The reason is that an average stock market dividend yield is 2%. That doesn’t leave you with any real return after inflation and taxes.

Are GICs, or other fixed income investments a good choice?

GIC rates have undergone significant change over the past quarter century or so. 30 years ago, you could buy a GIC, or a 30-year bond, and get an 8% to 10% interest rate. So, $1 million was generating $80,000 to $100,000 a year. The Great Recession of 2007-2009 led central banks to deliver historically low interest rates, making fixed income products like GICs far less desirable. However, interest rates have swung back upward in the fight against inflation in 2022 and 2023. When this decade started, the best 1-year GIC rate was yielding approximately 2.5%, so that million dollars is yielding $25,000 a year. Now, in 2023, you can find 1-year GIC rates that are approaching 6%. Harvest ETFs is on top of that shift, which is why we now offer a fixed income product class.

What investment options can deliver regular cash flow in my portfolio?

You may have to look at solutions that are designed to deliver cash flow. You may have to go beyond fixed income for capital preservation and stocks for growth. You may have to look for opportunities where stocks can generate income that was once delivered by fixed income.

What are the different ways to look at risk?

We may have to change the way we view risk. High risk could be viewed as the risk of not meeting your objectives. If your investment objective is cash flow, investing in a five-year GIC is exceptionally risky. True, it will preserve capital which reduces one risk, but it introduces a different level of risk which is not having enough cash.

Although equity strategies aren’t guaranteed, they’re designed to generate a cash flow that reduces the risk of encroaching on your capital. In a down market, $100,000 can drop by 10% or more, but that loss is not realized until you sell. Share prices go up and down, but if the company’s you own are the best of the best, they are more likely to continue to pay dividends in good times and bad.

As well, certain types of fixed income are riskier than stocks. For example, in order to generate the cash you need, you go down the credit quality scale. So, you are no longer looking for investment grade bonds like those offered by Canadian big six banks (eg: RBC, Scotiabank..). You’re looking at the depressed assets, or junior energy names, or emerging market fixed income with higher yields. That increases the risk level.

What does Harvest offer investors?

Our product lineup is designed for investors who look to generate a monthly income. We focus on companies who are leaders at what they do, that have strong cash flow, strong balance sheets and a commitment to dividend growth. We overlay that with a covered call strategy that generates additional cash flow and reduces volatility. For investors who are cash flow oriented, the reduction of volatility and enhanced income could be ideal solutions.

Can you give examples of an “Equity Income” ETF?

Can you give examples of a “Fixed Income” ETF?

The idea behind these ETFs is to invest in sectors or themes that have long-term growth, and in leading companies that pay dividends that grow over time. We overlay the stock selection in the portfolio with a covered call strategy designed to enhance income.

What are covered calls?

Covered call options are a strategy to help reduce downside volatility risk, deliver income and still participate in the market’s upside. You sell a portion of the potential rise in stock price in exchange for a fee. The fee limits the gain a bit, but it also acts as a cushion if share prices fall, because you keep the fee no matter what. Covered call options are a Harvest specialty.

Is there a tax benefit to using a covered call strategy?

Covered calls are tax efficient because the option premium is distributed in the form of a capital gain to investors. Capital gains are taxed at a lower rate than foreign dividends or, in general, tax paid at your marginal tax rate.



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