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Dale Jackson

Personal Finance Columnist, Payback Time


It’s up another rung on the risk ladder for retirement investors who need growth to get their portfolios to those sunset-sailboat retirements in the brochures.

This week the Bank of Canada held its benchmark interest rate at one quarter of one per cent for the foreseeable future. For borrowers that means yet another reprieve on paying down debt. For savers it means either settling for a near-zero return on fixed-income or venturing further into the murky waters of equity markets for income.

It’s the continuation of a trend going on twelve years when central banks slashed interest rates to near zero to unfreeze global money markets in the wake of the 2008 financial meltdown. Since then there has been plenty of talk about gradually increasing rates but the pandemic lockdown threw cold water on that.

It’s also a far cry from the early 1980’s when lenders were rewarded. At the time a guaranteed investment certificate (GIC) paid double-digit returns. Even with inflation, retirement investors could generate returns and pad the risk from the equities in their portfolios with a significant portion of their savings in safe fixed income products like government bonds. At the time, the general rule was to set aside a percentage of your portfolio in fixed income equal to your age to ensure the money would be there as you near retirement. In other words, half of your savings would be in fixed income when you turned 50 years old.

That rule has fallen by the wayside over the past decade; forcing savers to search for yield from dividend paying equities, which are being supported to a large degree by low borrowing rates. 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.

The stakes are even higher as more Canadian workplace pension plans shift from the safety of guaranteed payouts from defined benefit (DB) pensions to defined contribution (DC) pensions, which expose retirement savings to the whims of broader equity markets.

According to Statistics Canada, 48.4 per cent of employed men and 34.5 per cent of employed women were covered under a DB pension plan in 1977. At the time, DC pensions were virtually non-existent.

Today the proportion of DB pensions has plunged to 21.4 per cent for men and 28.7 per cent for women. DC pensions and DB/DC hybrid pensions now apply to nearly 14 per cent of employed men and just over ten per cent of working women.        

Overall workplace pension coverage has also declined over the years, leaving more Canadians having to supplement their retirement savings by further investing in often volatile financial markets through their registered retirement savings plans (RRSP) and tax free savings accounts (TFSA).

Even with yields near zero, retirement experts say prudent investors still need a good chunk of their savings in fixed income to stave off a significant and prolonged drop in equity markets. If cash and fixed income reserves run dry older investors in, or nearing, retirement who need to draw on a reliable source of cash for day-to-day living expenses could be forced to sell equities in a down market; leaving less money invested to grow over time and see them through retirement.       

One of the few options to maintain that safety cushion are short term GICs laddered (or spread out) over a few years. They only pay about one per cent but frequent maturities will create as many opportunities as possible to latch on to higher yields when they come.

If they ever come.