Whether you're dreaming of retirement, on the cusp of your golden years, or already enjoying a life of leisure, securing your financial future is paramount. This episode explores powerful ETF strategies designed to help you achieve your retirement goals, regardless of where you are on your journey. Discover how to build a portfolio that delivers consistent income, manages risk, and provides peace of mind for today and tomorrow.

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📈 Building a Balanced Pre-Retirement Portfolio with ETFs for Lasting Income and Stability

As pre-retirees approach the transition to retirement, building a portfolio that balances growth with risk management is crucial for achieving financial stability. For clients nearing retirement age, advisors often recommend strategically allocating Exchange-Traded Funds (ETFs), which offer diversity, liquidity, and cost-effectiveness. Two financial experts, Brent Vandermeer and Harp Sandhu, share their insights on structuring an ETF-based portfolio designed to meet the needs of a hypothetical 60-year-old client with a seven-year timeline until retirement and a goal of reaching $3 million in retirement savings. This guide outlines their recommendations, with practical strategies to maximize growth while managing risk.

Key Objectives: Income Generation and Risk Management

The hypothetical client, with a target retirement age of 67, currently earns $100,000 annually and has $500,000 left to save to reach their retirement goal. With moderate risk tolerance, the portfolio must ensure steady growth to close this gap and provide stable income in retirement. Vandermeer and Sandhu agree that ETF-based portfolios can effectively meet these needs, offering diversified exposure and risk control. Their approaches diverge regarding asset allocation and complexity, with Vandermeer focusing on portfolio “bookending” with alternatives and bonds, while Sandhu emphasizes simplicity and stability with a higher allocation to ETFs.

Approach 1: Bookending the Portfolio for Diversified Income and Stability

Brent Vandermeer, a senior portfolio manager with CrossPoint Financial, suggests a “bookended” strategy with specific components to protect against market volatility. He proposes a portfolio with three key elements: covered-call ETFs for consistent income, a cash reserve for liquidity, and alternative investments to enhance diversification.

Key Portfolio Elements

1. Covered-Call ETFs: Vandermeer advocates for a portfolio anchored by covered-call ETFs, which generate higher yields by selling call options on holdings. While these ETFs provide steady income, they may limit some potential for price appreciation. Vandermeer notes that explaining to clients that this yield-focused approach involves trade-offs is essential, as sacrificing upside can stabilize income returns.

2. Individual Stocks for Stability: Including select individual stocks can strengthen clients' confidence in their portfolios during market fluctuations. Vandermeer suggests including high-quality stocks chosen from CrossPoint’s proprietary research. Seeing familiar companies in their statements can reassure clients during market turbulence, encouraging them to stay invested rather than reacting emotionally.

3. Gradual Risk Reduction: Vandermeer recommends a 60% equities allocation, which can be adjusted as the client nears retirement. Two years before retirement, he advises reducing the equities portion by 5-10% to lower market exposure, then gradually adjusting upward post-retirement to maintain growth. This strategy aims for a moderate annual return of 4-5%, a realistic target for reaching the client’s savings goal.

4. Regular Risk Assessment: Continuous risk tolerance assessment is critical, especially as market conditions and client circumstances evolve. Vandermeer notes that clients often overestimate their risk tolerance, which can lead to discomfort during market declines. He emphasizes quantifying risk in dollar terms to provide perspective on the potential impact of market downturns on portfolio values.

Approach 2: Keeping the Portfolio Simple for Low Volatility and Steady Income

Harp Sandhu, a senior wealth advisor with Sandhu Wealth, Raymond James, recommends a straightforward, balanced approach for clients aiming for predictable income without excessive volatility. His strategy prioritizes simplicity, utilizing a higher proportion of ETFs to maintain ease of management while generating reliable retirement income.

Key Portfolio Elements

1. Balanced Asset Allocation: Sandhu proposes a portfolio split into 70% equities, 27.5% fixed income, and 2.5% cash. His allocation aims for moderate growth without excessive volatility, allowing the client to achieve their savings goal without the need for aggressive returns. He incorporates well-known ETFs, such as the Vanguard S&P 500 Index ETF for U.S. equity exposure and the BMO S&P/TSX Capped Composite ETF for Canadian equity exposure.

2. Canadian Dividend ETF for Downside Protection: Sandhu includes a Canadian dividend ETF with active management to add a layer of protection. Dividend ETFs often exhibit lower volatility than broader equity markets, as companies paying dividends are typically more established and financially stable. This allocation provides income stability, shielding the portfolio somewhat from market downturns.

3. Emergency Fund Strategy: Sandhu recommends setting aside $400,000 in an emergency fund structured across high-interest savings and GICs with staggered maturities (one to four years). This multi-layered approach ensures that cash is available if needed without liquidating investments, maintaining financial flexibility during retirement’s initial years.

4. Tax-Efficiency Strategy: Since the client’s taxable income will decrease between retirement and the mandatory conversion of their RRSP into an RRIF, Sandhu suggests transferring funds gradually from the RRSP into a TFSA during these years. This strategy helps optimize tax efficiency, allowing for tax-free withdrawals from the TFSA later in retirement.

5. Sufficient Income Yield for Expenses: Based on his portfolio structure, Sandhu projects that if the client reaches a retirement savings balance of $3.5 million, the portfolio could yield around $86,800 annually, assuming a conservative yield rate of 2.8%. This income would comfortably cover the client’s expected expenses of $70,000 annually, minimizing the need to sell assets to generate cash flow.

Comparing the Two Strategies: Bookended Complexity vs. Simple Stability

While both experts recommend an ETF-centered portfolio, their approaches offer distinct options to accommodate different complexity and management style preferences.

1. Complexity and Flexibility: Vandermeer’s bookended approach involves covered-call ETFs, individual stocks, and alternative investments, creating a more nuanced portfolio that requires ongoing management and frequent reassessment. This complexity provides flexibility but may not be ideal for clients preferring a straightforward investment strategy.

2. Simplicity and Predictability: In contrast, Sandhu’s approach emphasizes simplicity, with a significant allocation to passive ETFs that require minimal adjustment. His design aims to reduce volatility while ensuring stable income, appealing to clients seeking predictability without complex management.

3. Risk Management: Both strategies prioritize risk management but take different paths. Vandermeer recommends adjusting equity exposure as retirement approaches, while Sandhu suggests a consistent asset allocation with a balanced emergency fund. Both emphasize the importance of keeping the portfolio aligned with the client’s risk tolerance, noting that perceptions of risk may change over time.

4. Income Yield vs. Growth Potential: Vandermeer’s covered-call ETFs generate higher income but may cap growth, making this approach more suitable for clients focused on income over capital appreciation. Sandhu’s simpler strategy maintains growth potential through a blend of dividend and index ETFs, positioning the portfolio for long-term resilience without frequent adjustments.

Practical Considerations for Pre-Retirees Using ETFs

For pre-retirees, managing a portfolio with ETFs offers several advantages, such as cost efficiency and easy diversification. However, the chosen strategy should reflect the client’s goals, risk tolerance, and desire for active management or simplicity.

1. Cost-Effectiveness and Diversification: ETFs generally have lower fees than mutual funds and enable diversified exposure across asset classes, making them ideal for clients seeking efficient portfolio management.

2. Liquidity and Access to Income: Both strategies provide liquidity, which is essential for retirees needing to access their funds periodically. By including both dividend-yielding and income-generating ETFs, these portfolios can provide reliable income with manageable exposure to market volatility.

3. Long-Term Financial Planning: Advisors should remind clients of the importance of regular reviews to keep portfolios aligned with retirement goals, market conditions, and evolving financial needs. Adjusting allocation ratios and income sources may be necessary as retirement progresses to sustain long-term financial health.

In summary, constructing a pre-retirement portfolio with ETFs requires balancing income generation, growth, and risk management. Vandermeer’s and Sandhu’s strategies provide valuable perspectives, offering clients diverse options based on complexity, flexibility, and stability preferences. Whether through a bookended approach or a streamlined allocation, a well-constructed ETF portfolio can provide pre-retirees with confidence and security as they transition into retirement.

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