The best way to manage retirement money will take advantage of tax shelters, as well as sound portfolio-building strategies

There are good reasons to stay out of the stock market, but approaching retirement isn’t one of them.

As for the best way to manage retirement money and the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume there will be increases in the value of the bonds.

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Staying out of the stock market is generally not the best way to manage retirement money

If you simply can’t accept any instability in the value of your holdings, due to temperamental reasons or cash needs, that alone is a good reason to sell your stocks, regardless of age. For example, you may need every dollar you have for fixed financial commitments such as coming up with a down payment on a home in three years or less.

Some retirees worry about having to sell some of their holdings at low prices if they happen to need funds during a market downturn. To counter that specific fear, you may want to move some funds into GICs or bonds for current income for day-to-day or annual expenses.

As a rule, however, we think most investors should also continue to invest some of their money in stocks in retirement.

After all, high-quality stocks with sustainable dividends—like those we recommend in our newsletters—can provide tax-advantaged dividends (for Canadian stocks) and growth prospects. Over a period of years, stocks provide an attractive combination of total return, plus a hedge against inflation. Fixed-return investments provide no growth and no protection against inflation. Moreover, today’s interest rates are simply too low to provide an acceptable alternative.

Stocks and fixed-return investments both have advantages and disadvantages. You need to decide what combination of the two works best for you.

So-called “risk reduction strategies” won’t likely pay off longer term

This applies as well to “risk-reducing strategies,” of which there are many. One of the most common rules you should ignore is the urge to “go into cash” (also known as “taking money off the table”) when you foresee a market downturn. Like all risk-reducing strategies, this one can seemingly work from time to time, by getting you out of the market before a drop. But it’s even more effective at ensuring that you are out of the market when prices are shooting upward.

In the stock market, downturns do come along from time to time. But they are far less common than fears of downturns, which are virtually non-stop. We usually have an opinion on the market outlook. But as you know, we downplay predictions, ours included, due to the random factor. Instead, we look for opportunity and diversification, and we focus on the long term.

Use conservative expected return calculations as the best way to manage retirement money

Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your retirement planning—5% a year, say—to allow for unforeseeable problems and setbacks.

Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.

One thing we encourage all successful investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.

RRSPs are a key part of the best way to manage retirement money 

RRSPs are a great way for investors to cut their tax bills and make more money from their retirement investing.

They were introduced by the federal government in 1957 to encourage Canadians to save for retirement. Before RRSPs, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income.

RRSPs are a form of tax-deferred savings plan. They are a little like other investment accounts, except for their tax treatment. RRSP contributions are tax deductible, and the investments grow tax-free.

You only pay taxes on your RRSP investment, and the income it earns, when you make withdrawals from your RRSP. The money you withdraw is taxed as ordinary income, and a withholding tax is applied at the time you make the withdrawal.

Successful investors put their safest investments in RRSPs. These investments have the greatest potential to increase in value over time and therefore benefit from the RRSP’s continuing protection from taxes.

Use our three-part Successful Investor approach as part of the best way to manage retirement money 

1. Invest mainly in high-quality investments;
2. Spread out your holdings across most if not all of the 5 main economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities);
3. Stay out of stocks in the broker/media limelight. 

What retirement investments do you feel the most confidence in?