Advice for a friend approaching retirement

I have a good friend who has just retired. He puzzles over what he should do now with his investment savings. He is no longer saving for retirement but he IS retired. The day that will never arrive has arrived.

My friend worked all his life. He will be collecting a tidy monthly sum from CPP. His wife didn't work as long as he did but she too will collect CPP but a lot less and some years in the future. She is a few years his junior.

Of course, they both will collect OAS. She will have to wait a few years before her cheques begin arriving but she will be 65 sooner rather than later. Time passes quickly.

My friend also has an excellent pension. This will be the main source of retirement income as his wife, if she has a company pension at all, will have much smaller pension than her husband. 

In the short term, my friends will be fine. They will be able to live with their reduced income until all sources of retirement income mature. At the point that they are both receiving CPP and OAS plus hubby's pension, they will have more than enough money to live very nicely.

The thing is, they both have retirement savings plans. What to do with these six figure accounts? This is not as easy a question to answer as one may think. I'd suggest they have at least three options:

Cash out the accounts, take the money and run. This is not possible if an account is a locked-in-plan of some kind. And, at any rate, this is not a good idea. Forget it. Never squander retirement savings.

Convert RRSPs to RRIFs and locked-in-plans to LIFs and be ready to withdraw annually the amount demanded by the government. The withdrawal increases with each passing year. Google it. In my opinion, there is only one place to put the money: equities. Equities increase in value in step with inflation and with any luck will increase in value quicker than inflation erodes that value.

How does one invest in equities? 

Set up a self-directed investment account with your bank, if possible. TD, Royal, Scotia, CIBC and others all offer this service. There are only three investments with which I concern myself:

• Money market funds. These are paying something in the order of 4.3% today with no risk to capital.
  
• Direct equity ownership. The big rule here is "diversify". Try to own no less than 20 stocks and no more than 30. Consider weighting your portfolio to stocks paying a good dividend.
  
• ETFs. My fave here is XEQT. This is an entire portfolio in one purchase, one ETF. If one does not need dividend income, XEQT may well be the way to go. Buy, hold and watch it grow in value over the years. XEQT holds no bonds but more than 9000 stocks from markets all around the globe.
  

Stay away from bonds. Do a little research and you will soon agree; for the small investor, bonds are not worth holding. And stay clear of mutual funds. ETFs are a "yes" and mutual funds are a "no". It is that simple. 

I don't have a good pension. I need cash flow. I own two dozen or so good, solid, dividend-paying stocks. The dividends pay the bills. My friend has a good pension. He and his wife do not need the cash flow. If I were him, I'd simply buy XEQT and let the units sit and grow in value. I might spend the small dividend income as "mad" money.