Where should you invest an extra $50,000 in your 60s?

Where to invest a large sum of money when you’re in or nearing retirement

Congratulations on having $50,000 available to invest, Ty. You do not say how you came into that money or describe your current financial situation. For some, it could be considered quite a windfall. Let’s consider a few different situations first and then move on to possible recommendations.

Do you have debts?

Investing a lump sum of $50,000 sounds great. However, receiving an investment return of 5% is not going to do much for you if you are carrying a balance on a credit card that is charging you 20% interest. Paying off high-interest debt will provide you with a greater net return than you are likely to receive from any long-term investment.

What about mortgage debt? A year or two ago, with some mortgage rates available below 2%, I might have advised that you invest rather than aggressively pay down any amounts owing, but with advertised rates at greater than 5%, if your mortgage is up for renewal this year, you would do well to consider reducing the amount you owe.

Your age is another reason to consider paying down your debts. You do not indicate whether you are retired or planning to retire soon, but going into retirement with significant debt can limit your financial flexibility. That regular obligation to pay will continue regardless of your income situation.

Consider, as well, a 2015 poll from the Angus Reid Institute, which found that 48% of those polled retired earlier than they had planned due to circumstances beyond their control. Clearing yourself of debt puts some level of control back into your hands.

Do you have an emergency reserve fund?

One more item to consider before we move into considering investment options is the presence of an emergency reserve or contingency fund.

You have your regular expenses for food, shelter, transportation, etc., and hopefully, you have those expenses covered with your regular income. But do you have enough to cover unexpected expenses like a furnace repair, or replacement income if you were to lose your job? A new furnace could cost $5,000, and a lost job could take three to six months to replace. Depending on your household expenses and eligibility for Employment Insurance, you might need to cover $30,000 or more.

If you don’t have that amount of money available, I encourage you to set aside some of the $50,000 for exactly those kinds of contingencies. Put the appropriate amount of money in an easily accessible high-interest savings account (HISA) and you can invest the balance in a suitable long-term portfolio.

What are your investment options?

Let’s assume you don’t have any debts and you have enough money set aside for contingencies. We can finally address your question directly. You indicate that you are 62 years old. Although many people are still working full-time at your age, others are already retired.

For the sake of this discussion, let’s assume you are still working but plan to retire in three years when you turn 65. Does that mean you should keep the money in short-term risk-free investments like guaranteed investment certificates (GICs)? That may be a suitable option depending on what your portfolio looks like and when you think you will need to withdraw from it to fund your spending needs.

Consider your lifespan

Don’t assume that retirement means you need to eliminate all investment risk. You also need to consider the risk of outliving your money, so-called “longevity risk.”

According to the Institut québécois de planification financière (IQPF) and FP Canada Standards Council’s Projection Assumption Guidelines, a 62-year-old has a 50% chance of living to age 89 (male), 91 (female), or 94 (when being the last to die of a male/female couple). FP Canada encourages financial planners to consider 25% probabilities of survival, which raises those ages to 94, 96, and 98, respectively.

In other words, unless you have reason to believe that you will die young, you should plan to live for another 30 years or so. This argues for allocating more of your investment to riskier assets, like equities, rather than risk-free deposit products like GICs or savings accounts.

Decision #1: Equities vs fixed income vs cash

You asked “where” to invest $50,000. I will take that to mean, in this instance, that you are referring to asset allocation, as in where you should allocate your money across equities, fixed income, and possibly cash or cash-equivalent investment products.

If you use an investment advisor or robo-advisor, you will be given a questionnaire to complete that will help determine a recommended allocation for you. If you are self-directed, using an online or discount broker, then the asset allocation is yours to determine.

A rule of thumb is to allocate a percentage to equities equal to 100 minus your age, with the remaining balance in fixed income (think GICs or bonds). At age 62, that would suggest you invest 38% in equities. However, rules of thumb do not recognize your particular circumstances. If you are struggling to figure out what sort of balance you should have between equities and fixed income, you may want to try this free investor questionnaire from Vanguard. Another aid to figuring out your risk appetite is to use a risk tolerance assessment from InvestRight, a service of the BC Securities Commission.

Further diversify your investments

If equities and fixed income are the two most basic diversifiers, the next question to ask is about diversification beyond Canada.

Most investors around the world have a bias for their own countries’ stocks, and tax rules tend to encourage that bias by, for example, taxing dividend payments from domestic companies more favourably. However, the value of global diversification should not be ignored, especially since Canada makes up only about 3% of the world’s stock market value.

This can quickly get complicated, but one way around this is to invest in asset-allocation exchange-traded funds (ETFs).

Dan Bortolotti, a frequent contributor to MoneySense and portfolio manager at PWL Capital, has some model portfolios on his Canadian couch potato website, as does his colleague, Justin Bender, on his Canadian Portfolio Manager blog. Once you have decided on your asset allocation, adapting models from either of these investment professionals will provide you with a well-diversified portfolio.

Decision #2: RRSPs vs TFSAs vs non-registered accounts

Most Canadians use two or three account types. The first is the registered retirement savings plan (RRSP). With this account type, qualifying earned income will generate contribution room. Contributions will create a tax deduction and any assets that are invested within the RRSP will grow tax-free until withdrawn. Contributions are capped, however, and if you have been a diligent investor, you may have little room for your $50,000.

Another account type is the tax-free savings account (TFSA). Unlike the RRSP, you do not get a tax deduction for your contribution, but investments grow tax-free within the account and can be withdrawn tax-free as well. Contributions to a TFSA are not governed by your earned income. Instead, there is a TFSA annual contribution limit declared by the federal government and is currently targeted to increase by the rate of inflation in $500 increments.

As of 2023, the new limit is $6,500. If you have been eligible to contribute since 2009, the first year of the TFSA, but have never done so, you now have $88,000 in contribution room. Again, though, as there is a limit, if you have been keeping up on your TFSA investments, you may have no more than $6,500 in contribution room.

If neither the RRSP nor the TFSA can absorb your $50,000, the third alternative is a non-registered account. This account is taxable, although interest, dividends and capital gains are each taxed differently.

Let’s return to the RRSP and TFSA once more before moving on. If you have the contribution room to invest in either account, which one should you prefer? This is largely a tax question. At age 62, you may have a good idea of what your income in retirement is likely to be. If your income now is considerably higher than it is likely to be in retirement, then the RRSP is a good account type to invest in as you will get a larger refund now than you will have to pay in tax in retirement.

On the other hand, if your income in retirement is likely to be the same or perhaps even higher than now, then the flexibility of use and the tax-free nature of withdrawals argue for the TFSA over the RRSP.

Tax-conscious investors sometimes try to place specific investment assets in one of the account types based on their tax treatment. The classic examples are to put interest-bearing investments and U.S.-domiciled stocks or ETFs in the RRSP while putting Canadian dividend-paying stocks in the non-registered account.

Although this can be done, the more likely outcome is that you will find it increasingly difficult to maintain your preferred asset allocation and wind up introducing a different level of risk into your account than you had desired. Do yourself a favour and invest using the same allocation across all accounts.

Decision #3: Online brokers vs robo-advisors vs full-service advisors

The commentary above assumes that you will be fully in charge of your investment decisions by using an online broker. However, you may not be interested in managing your investments as you get older. In that case, you may wish to use a robo-advisor. You will still have to decide in which account or accounts to invest the money, but the robo-advisor will do the investing for you.

One more place you may wish to consider is the full-service investment advisor. Your advisor may be independent and have access to a variety of investments, or they may be limited to a certain fund issuer. Either way, you will get investment recommendations provided to you, which may be something you prefer. Both these options will be more expensive than investing on your own, with the full-service investment advisor almost certainly the more expensive of the two. However, depending on your needs, either one could be the right choice for you.

Another option: Gifts and charitable donations

Until now, the discussion has been entirely about investing for yourself. However, depending on your financial needs, you may wish to consider gifting all or a part of your $50,000. Nearest to home, perhaps you would like to give some of the money to a registered education savings plan (RESP) for a grandchild.

Another option is to donate to a registered charity. The government encourages charitable giving by providing for larger tax credits on amounts over $200. Those who earn income that is taxed at the highest marginal rate can get an even larger federal credit on a portion of their donations.

I cannot tell you precisely where to put your $50,000, because there are so many options available to you. But rest assured, there is a place where that money will serve you well.

This column was written by Russell Sawatsky, CFP, CIM, is the owner and advice-only financial planner of Money Architect Financial Planning, in London, Ontario.

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