The article “Cautiously Investing for Retirement” was originally published on MoneySense on September 8, 2015.

How to generate retirement income without a company pension plan

Q: I have funds sitting in a high interest bank account. I am totally risk adverse because of a partner’s unfortunate business investments and resulting bankruptcy. I have favoured real estate always. What should I do as a senior with no company pension or income from investments?


A: It’s unfortunate to hear about your partner, Dee. I am guessing that they are also a senior and may be coming into retirement with limited savings.

When people talk about investment risk, I think that they mistakenly focus on the short-term fluctuations of the stock market. It’s the 6 o’clock news effect. Or these days, the Facebook effect.

In the long term, stocks go up. The Toronto Stock Exchange has returned 7.6% annualized in the 10 years ending Dec. 31, 2014. Over 20 years and 30 years, returns have been 8.83% and 8.97% respectively.

While some companies will fail–whether private, like your partner’s company, or public, like Nortel–there will always be companies that provide good goods and services and make a profit for investors.

Bonds aren’t yielding much currently due to today’s artificially low interest rates, but they too will someday rise.

And while we are often preoccupied with short-term market fluctuations and the resulting perception of risk, Dee, there is a much more important long-term risk of outliving your money if your sub-1% high-interest savings account return is not keeping up with inflation. The Bank of Canada recently estimated Canada’s underlying inflation trend at 1.5-1.7%. Their target is 2%.

If you are more comfortable with real estate, a rental property could be a consideration. Rental properties can have excellent pension-like qualities. Real estate typically is a good hedge against inflation, rising with the general cost of living (and sometimes much more). In the past 35 years, real estate growth has exceeded inflation in Canada by about 2.3%, in fact. Rental income rises with inflation as rents go up, generally resulting in an increasing income year over year.

But if the majority of your assets reside in your home currently, adding more real estate exposure at such a frothy point in the real estate market cycle could prove to be much riskier than investing in stocks.

Incidentally, in the past 60 years, stocks have been a better hedge against inflation. They have returned 5.8% in excess of the inflation rate in Canada.

Conservative investors always have the option of an annuity. An annuity is purchased from a life insurance company with a lump-sum up front and based on your life expectancy and interest rates, you will receive a monthly payment for life. So you can literally buy a pension in that regard, but once again, another risk persists–you’re locking in today’s low interest rates forever. At least an annuity negates stock market risk, the risk of outliving your money and gives you a pretty set retirement budget.

Keep in mind that you will have entitlement to the Canada Pension Plan and Old Age Security pensions as you move into retirement, Dee, so you have some pension income to fund your future expenses. Beyond that, you will be drawing down on your savings with ongoing withdrawals which you can actually set up automatically to be like a pension, with set deposits to your chequing account biweekly or monthly if you’re so inclined.

I’ve been dancing around my main point though, Dee. Cash may feel safe, but in the long run–where you will spend your retirement–stocks should provide a far superior potential retirement income. It doesn’t mean that you need to put all of your savings into stocks, but considering at least a small allocation to stocks, despite the volatility, should help your retirement savings last longer.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.