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Dale Jackson

Personal Finance Columnist, Payback Time

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Growing your retirement nest-egg safely became even more elusive this week after the Bank of Canada reiterated its pledge to keep its trend-setting interest rate near zero for years to come.

For borrowers it’s a reprieve, but for savers looking for a safe haven in fixed income it’s the continuation of more than a decade of paltry yields.

Bank of Canada Governor Tiff Macklem held Canada’s benchmark rate at 0.25 per cent until the country’s COVID-battered economy can sustain an annual growth rate of two per cent. In the meantime, safe fixed income investments such as guaranteed investment certificates (GICs) will trickle out annual returns of about one per cent. 

It presents a real dilemma for Canadians saving for retirement through registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), and workplace defined-contribution (DC) pension plans. A typical retirement plan calls for portfolio growth of between five per cent and eight per cent. Much of the heavy lifting is done through equity investments linked to the stock market, and that risk is offset by a significant portion of fixed income. 

Lower fixed income yields will continue to force investors to generate income by putting a greater proportion of their retirement savings into riskier equity investments such as stocks that pay dividends. Unlike fixed income, dividends are paid at the discretion of the company and the underlying stock is subject to price changes at the discretion of the market. With the threat of a second wave of COVID-19 and a turbulent U.S. presidential election campaign, equity markets could be in for a wild ride.    

That could cause even more grief for older investors in, or nearing, retirement who need to draw on a reliable source of cash for day-to-day living expenses. If cash and fixed income reserves dry up, they could be forced to sell equities in a down market, leaving less money invested to grow over time and see them through retirement.        

Longer term government and corporate bonds can pay out a bit more but many bond experts say the extra yield is not worth the added risk of default, and having your money exposed to the market for long periods of time.   

One questionable fixed income option is bond funds. Many investment advisors substitute them for the fixed income portion of a portfolio but returns are not consistent. That’s because holdings are often traded before maturity, and the funds themselves are subject price changes. In other words: income is not fixed. In many cases, advisors only have access to mutual funds, which pay them a commission.

Good advisors say fixed income should always have a place in a diversified portfolio regardless of yield. Even at zero, fixed income could be your best performing asset class if equity markets are down. The portion of a portfolio that should be dedicated to fixed income depends on the comfort level of the individual investor but should increase as they get older and closer to the time when they want to withdraw funds.

They say the best way to squeeze out the highest yields over the long term is to ladder maturities over different time intervals. The goal is to have fixed income maturities come often so there are more opportunities to get the best yields.  

Deciding to sacrifice returns for security is a gut-wrenching reality in today’s economy. You might not reach your return goals, but at least you can rest easy knowing that something will be there.

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.