Retirees Must Add Risk Back

Traditional investment methods teach investors to make a transition from growth to capital preservation strategies as they approach retirement. This allows investors to focus on preserving wealth and preventing losses and generating income. It has been used by millions of Canadians for decades and will continue to be used, but this strategy still advised by professionals is becoming outdated because of today's low interest rate economy.

Low interest rates will remain a part of the global economic plan until growth in confidence is restored and for most governments, including Canada, elevated interest rates won't be available until at least 2015. For retirees with capital preservation strategies, their savings will be diminished at an alarming rate, especially to the millions that have wealth locked up in RRSP accounts.

Needless to say, low interest rates will reduce returns, especially for those invested heavily in bonds. A 10-year government of Canada bond is yielding 1.62 per cent (view Bank of Canada yields here). That is less than the target rate of inflation of 2 to 3 per cent. If returns can not keep pace with inflation, it forces retired investors to sell more than they expected, reducing their overall wealth and the lifespan of their nest egg.

For those that have most of their savings in RRSP's, they will notice that mandatory withdrawal amounts exceed returns. Although this is already a common downside with RRIF accounts, low yields will continue to force investors to sell more of their bonds. It is this reason why retirees must consider adding risk back into their portfolios.

CPP and OAS (if qualified) will cover basic expenses but is it enough? Choosing to re-balance back into riskier assets like stocks is a tough decision especially having gone through three recessions in the last ten years and stock market volatility will never cease to exist. But great deals can be found in Canada that allows investors to save a little wiser.

Canadian investors looking to stay north of the border will find billion-dollar companies with generous and growing dividends. Although the risks of the stock market will always be in play, dividends will remain consistent in our economically better country. Yields above 4 per cent can be found in 16 of Canada's 60 biggest companies as of September 25, 2012. Click here to view an updated-daily list of the TSX 60's yields. These 16 stocks include major banks, competing telecom providers, and energy and resource companies creating a fairly diversified portfolio.

An added benefit to holding equity over bonds is that one can sell just a few shares of a stock to cover, while bond holders would have to sell one unit which in this day in age would be near $1,000, even if the investor required just $200.

The capital preservation techniques devised years ago are not applicable in today's economy. It assumed yields near 4 per cent (that is what we used in college), but that is not realistic for the foreseeable future. Investors must shift more focus back into risk if they plan on living off their life savings. It isn't right that so many millions of Canadians will blindly follow the advice of an advisor simply following the traditional investing methods. Investors must think outside the box and come to the realization that their savings are being hurt by fiscal policy meant to bolster economic activity. Otherwise, individuals in retirement would have to go back to work just to make ends meet.