The article “Is a Couch Potato Portfolio Appropriate For Retirees?” was originally published on MoneySense on June 30, 2015.
It can be, as long as it meets your cash flow needs
Q: My question concerns the Couch Potato Portfolio as outlined in MoneySense. I am 57 years old and wondering if this investment strategy is wise or would it be better in a situation if you have a longer period to wait before retirement?
I could see not needing to cash in for at least 5 years or perhaps it’s better to invest a portion of my savings as I would certainly not need it all at once.
I guess my question is the realistic time period one should have before investing in this sort of portfolio.
—MJ
A: Investing for the long run is hard enough sometimes. But when you’re investing for the shorter run because you’re close to or into retirement, at least a portion of your portfolio is likely needed for cash flow. So your question is a good one, MJ, given the conventional advice out there for investors often doesn’t contemplate drawdown mode.
I think your starting point is to do some number crunching to determine how much you might need from your portfolio and when you might need it. A 5 to 10 year projection might be helpful to determine how much you might need to withdraw from interest and dividends and how much you might need to withdraw from capital. That can then help you determine an appropriate asset allocation for your investments.
A Couch Potato Portfolio can have a short-term allocation by having more of a shift towards bonds instead of stocks. So it doesn’t automatically have to be for a long-run time horizon, MJ.
If you’re lucky enough to be living mostly off of investment income, you can probably take a long-term approach with your portfolio. But if you need capital, you have a couple choices.
One option is to systematically sell off the investments in your Couch Potato Portfolio as you need cash flow. It may be monthly–but you have to be cognizant of transaction costs.
A better option currently might be to sell off a proportionate amount of each of the holdings in your portfolio each year when you are rebalancing to provide enough cash to supplement your current year’s withdrawals. You can keep the proceeds in a money market mutual fund or a savings account and supplement your monthly cash flow as needed. The lost interest relative to a bond fund might not be much, especially given the savings on transaction costs to sell ETFs once a year when you’re otherwise rebalancing anyway.
Part of the complexity with any portfolio, MJ–Couch Potato or otherwise–is where to draw from. If you just have RRSPs, it’s easy. But some people have RRSPs, TFSAs, non-registered and corporate assets. This gets a bit trickier. And from a tax perspective, it may be that these accounts should have different asset allocations, rather than just a blanket asset allocation across all your accounts.
Investing really should marry asset allocation, fees, taxes and cash flow planning. For a do-it-yourself investor, a passive Couch Potato Portfolio can allow you to focus on these black and white areas rather than also dabbling in the grey area of which investments to buy and sell actively.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.