Should I get back into the market at age 71

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By Julie Cazzin with Allan Norman

Q: I am turning 71 this year and have to convert my $443,000 registered retirement savings plan (RRSP) into a registered retirement income fund (RRIF). My husband just turned 62. Since I retired five years ago, I have become very apprehensive about a big market correction and I have been sitting in just money market funds for some time. I need some help getting back into the market. I would like a simple passive portfolio that makes annual returns of at least four per cent with some stop-loss orders to reduce risk, meaning if the markets drop 10 per cent, I’m out.

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I also have trouble understanding the real costs of various scenarios and tax implications. My husband is on a disability pension that will end when he turns 65. He only has $70,000 in his RRSP and will probably only get $150 per month through the Canada Pension Plan (CPP). We look poor on paper right now so I have been getting Guaranteed Income Supplement (GIS). We have been living on his disability and my government pensions. We live in Richmond, B.C. and own our townhouse outright so we have no mortgage. We also each have $57,000 in tax-free savings accounts (TFSAs). — Antonia

FP Answers: Antonia, with markets at all-time highs, and your reliance on your investment income to live comfortably, being apprehensive about getting back into the market after pulling out is not unusual. A quick review of some market history, summarized by Dimensional Fund Advisors. for illustration only, may give you the confidence to jump back in.

What does history tell us about investing at all time highs? Well, if you invested in the S&P 500 stock market index from 1926 to 2023 only during the years of high market returns, your average return over the next one, three, and five years would be 13.7 per cent, 10.6 per cent, and 10.2 per cent, respectively. If, instead, you invested only after the market dropped 10 per cent or more, your returns over the next one, three, and five years would be 11.5 per cent, 10.3 per cent, and 9.6 per cent. This historical data seems to fly in the face of investment advice to buy low and sell high.

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Now consider this: The S&P 500 returned an average of 10 per cent from 1926 to 2023 with 72 positive years and 26 negative years. More interesting, there were only 6 years out of the 97 years in which the annual average return was within plus or minus 2 per cent of the 10 per cent average. It is rare to earn the average return on an annual basis.

Finally, over the past 20 years from 2004 to 2023 the U.S. Russell 3000 — a U.S. stock index made up of the 3,000 largest U.S. stocks — only experienced three calendar years with negative returns but every year experienced some type of significant market drop. Negative returns ranged from minus 5.24 per cent in the calendar year 2018 to minus 37.31 per cent in 2008. In fact, 12 of the 20 years had market drops of 10 per cent or more sometime during the year and only three of those years resulted in a calendar year with a negative return. This just goes to show that getting out of the market after a 10 per cent drop would likely hurt long-term returns.

Antonia, buy-and-hold passive index investing has been shown to work, and evidence suggests market timing doesn’t. Before deciding on an investment approach, spend some time to determine the return you need to support your retirement. Is it 4 per cent annually? If so, guaranteed investment certificates (GICs) or an annuity may work. If you need to earn a higher return, then maybe you do need to get back into the market. But the question is, how much of your portfolio should be in equities?

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If you don’t want your portfolio to drop by more than 10 per cent, then why not start there? In the past 20 years the Russell 3000 experienced one drop of about 50 per cent, which started in November 2007 and reached its bottom in February 2009. This was during the time of the global financial crisis. If you think you can earn 4 per cent on safe money, then consider investing just 25 per cent of your investments in equities and leaving the remaining 75 per cent in less risky investments, such as GICs. In this case, a decline in equity markets of 50 per cent would translate into a total portfolio drop of a much smaller 10 per cent for you. Alternatively, if you want to protect against a 30 per cent drop in equities, you could invest about 40 per cent of your portfolio in equities. Again, this is a starting point, and it may be all you need.

When it comes to your RRIF, it is likely you will lose some or all the GIS once you start the minimum RRIF withdrawals. Base your RRIF’s minimum withdrawals on your husband’s age rather than yours to minimize tax. At age 72 you are required to draw 5.4 per cent, or $24,300, on $450,000. Your husband, at age 63, is required to draw 3.7 per cent, or $16,650. Of course, you can always draw more from your RRIF if needed.

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Has your husband applied for the disability tax credit and is his estimated CPP of $150 per month correct? It seems low but I don’t know his employment history. If you are estimating, remember that the years he is disabled are waived from the qualifying period.

Also, are you each other’s successor holders on your TFSAs? It might be best to draw a regular income from your RRIFs and save your TFSAs for large ticket items (vehicles, renovations, travel, medical expenses, etc.) that may push you into a higher tax bracket.

And finally, consider this Antonia: I know you asked for some help getting back into the market, but ask yourself if you really need to get back in at all? Increased investment knowledge may help reduce your apprehensiveness and deal with market corrections, but it doesn’t eliminate those things. The trick is to find the right balance of risk you are willing to take for a worry-free, enjoyable retirement. It would be a good idea to talk to a planner to get more clarity on other retirement options.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.

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