The RRSP guide for investors in their 40s

The asset allocation question

Mark Werner’s 45th birthday came and went without much fanfare. He went to work, had a little celebration with family and that was about it. The next day, though, he woke up and felt a slight sense of panic. He suddenly realized that he was about 10 to 15 years away from retirement. “It just hit me,” he says. “I’m not a young guy anymore.”

Werner, who owns E-Bridge Technologies Corp., a Toronto-based IT consulting firm, doesn’t feel any different than when he first put money into his RRSP at 24. He still thinks of himself as someone with decades of saving ahead of him, something his fairly aggressive RRSP portfolio reflects: It’s currently made up of about 70% equities and 30% fixed income, with the stocks portion split evenly between Canadian, American, European and emerging markets funds. While he owns several diversified equity mutual funds, about 10% of his portfolio is always in higher-risk securities. He’s owned booming tech stocks, Chinese mutual funds, pharmaceutical companies and other risky investments.

When he started investing decades ago and had a long time horizon, that mix made sense, even if it’s given him a scare or two. During the 2008-2009 recession his portfolio dropped by about a quarter, losing $100,000 in a few short months. He’s made that up since—in part by continuing to buy during the downturn—but the closer he gets to retirement the more nervous he gets about losing that kind of money again.

Thankfully, saving hasn’t ever been an issue for Werner, who has often maxed out his yearly RRSP contribution limit. He automatically deducts about 75% of his contribution from his paycheque and then tops it up with a lump sum for the remainder come deadline time. For his efforts, he has about $450,000 in his account today.

But now that Werner is in his mid-40s, he’s beginning to question his asset mix. For years, he’s been told that the closer one gets to retirement the more money they should have in fixed income. “Attitude-wise I’m young and I think I should be fairly aggressive with my investments, but when you look at risk surveys that ask how old you are, they tell you something different.”

He’s wondering if he should allocate more of his money to bonds, income funds and other less volatile investments. “If I’m planning my retirement in 10 years, I don’t want to be in a place where I’ve lost a large part of that investment.”

What the experts say

Werner isn’t the only one to have this type of post-birthday I’m-close-to-retirement epiphany. In fact, Ryan Lamontagne’s Campbell regularly gets panicked calls from people in their mid 40s who have just passed a birthday and have questions about their asset allocation. “It makes sense,” Campbell says. From age 30 to 45, people are figuring out how to meet their goals, whether that’s retirement or paying down a mortgage. “In their mid 40s, they’re starting to wonder if they are actually hitting their targets and how to make sure they stay on the right track,” she says.

But, as common as that asset allocation question is, it’s the wrong question to be asking, says Campbell. What Werner (or any other forty-something) should be thinking about is whether or not he’s saving enough for retirement. As life expectancy has expanded and interest rates have fallen, people need even more money than before. Right now, conservative investors likely won’t make up any gaps in the bond market, which is only returning around 2% today.

This means that people need to save more for longer, and they may need to stay invested in equities for longer, too. Conventional wisdom once suggested the percentage of equities in a portfolio should equal 100 minus your age—so 60% if you’re 40 years old. But in our current environment, a more aggressive guideline is to subtract your age from 120 to determine your allocation of stocks; conservative investors can use 110.

As with any rule of thumb, though, “take it with a grain of salt,” says Heath. When you’re choosing an asset allocation, your required rate of return to meet your retirement savings goal is key. More importantly, you must also make sure you’re accounting for your own personal risk tolerance: “If an investor doesn’t realize the potential losses that their portfolio could see in a bad year,” says Heath, “you risk the chance of making a temporary stock market decline a permanent one by having them in cash at the low point.”

So someone like Werner, who has 15 years before he retires, should have the majority of his retirement savings in equities, “especially in this low-rate environment,” says Heath. For those who aren’t comfortable taking risk, remember you’ll still need to generate some sort of return to meet your retirement objectives, he adds.

Werner doesn’t need to change his allocation now. Instead, he should revisit his allocation when he’s about five years away from needing the money in his portfolio. What he does need to think about, however, is whether he needs to save more in order to meet his retirement goals. There are many online tools and calculators that he can use, while financial planners can build retirement models based on his personal situation. “This is the time to figure all of this out,” says Heath.

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