Building better retirement portfolios: A Paycheque Portfolio™ approach

IN Partnership with

David De Pastena, Vice President, Dynamic Funds Portfolio Solutions, details the strategy that helps to build sustainable income in retirement

FROM LONGEVITY risk and inflation to rising rates and increased market volatility, there’s no shortage of challenges for today’s retirees and those on the cusp. In a recent survey, 55 percent of Canadians say their retirement plans have been affected by current economic conditions. In today’s economic climate, the traditional 60/40 portfolio is ill-equipped to generate the income needed by retirees. This is because the assets in the balanced portfolio are focused on accumulation rather than protecting the income stream – a top priority for many Canadian investors. This traditional approach leaves many retirees and pre-retirees exposed to the negative impacts of a market downturn, and forces them either to sell assets or delay retirement altogether. When it comes to building retirement portfolios, the key is having a strategy that lets advisors deliver the retirement income clients need, without having to sell the investments that are producing the cash flow – especially when markets are down.

Dynamic Funds, a division of 1832 Asset Management LP, is one of Canada’s most recognized asset management firms. We offer a comprehensive range of actively managed wealth solutions, including mutual funds, ETFs, hedge funds, alternative strategies, and managed asset programs.

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“The key is having a strategy that lets advisors deliver the retirement income clients need, without having to sell the investments that are producing the cash flow”

David De Pastena, Dynamic Funds Portfolio Solutions

It's a similar approach to owning an apartment building. The value of the building will go up and down, but for someone looking for an income, the building’s current value isn’t what’s most important. They want consistent rents from the building, and don't want to have to sell the property. We do this by spending income, not capital.

With valuations in better shape, inflation slowing, and volatility down, the case for fixed income today is very strong. Today’s higher yields have opened up potential opportunities for investors to generate better returns, diversify portfolios, and lock in attractive income across the fixed-income spectrum. Because the focus is on yield, you’ll see a different asset mix (compared to traditional portfolios), with real estate, infrastructure, equity income products, and alternative strategies like options writing. On the fixed-income side, you’ll see more credit and maybe even preferred shares. It’s important to note that with the Paycheque Portfolio approach, we're not trying to maximize return for risk; we're trying to maximize yield for risk, which is very different. We’re essentially creating a balanced, income-producing portfolio.

For advisors, the ideal time to implement the Paycheque Portfolio approach is during that “golden window,” stretching from five years before retirement to roughly five years into retirement, a period when many clients are already considering changes to their portfolio. Clients are looking for their advisor to help alleviate their retirement concerns; this is truly an opportunity for advisors to make a difference. Getting clients into this strategy five, or even seven, years before retirement can be extremely helpful, especially in down markets. Clients who don’t need the income will be reinvesting their distributions, which will purchase more units during a downturn and ultimately generate more future income. It’s also a critical opportunity to help new retirees – before a market correction negatively affects their account.

Failing to act may expose clients to additional risk. That's why that golden window is so critical to focus on. When it comes to retirement planning, it's all about risk management. For more information on building better retirement portfolios, please see our article, Retirement Income to Last a Lifetime, Portfolio Construction With a Paycheque Portfolio™ Approach. Find out more at dynamic.ca/RIC or contact your Dynamic Funds Sales representative.

Old couple eating watermelons. Retirement portfolio.

A Paycheque Portfolio Approach: Three Key Differentiators Focused on Yield

Published 06 November 2023

Key considerations for advisors

When it comes to minimizing taxes, it’s important to stress that there’s no one-size-fits-all solution; every situation has to be assessed on its own merits. The Paycheque Portfolio approach gives us the flexibility to tailor the income for maximum tax efficiency. It’s an especially effective strategy for high-net-worth clients (i.e., asset base of $500,000 to $5 million), because the greater flexibility we have in account allocation allows us to be much more tax-efficient in delivering income.

Tax efficiency is key

Timing is critical: The “golden window”

Disclaimer: Commissions, trailing commissions, management fees, and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Views expressed regarding a particular investment, economy, industry, or market sector should not be considered an indication of trading intent of any of the mutual funds managed by Scotia Global Asset Management. These views are not to be relied upon as investment advice, nor should they be considered a recommendation to buy or sell. These views are subject to change at any time based upon markets and other conditions, and we disclaim any responsibility to update such views. Scotia Global Asset Management® is a business name used by 1832 Asset Management L.P., a limited partnership, the general partner of which is wholly owned by Scotiabank. Dynamic Funds® is a registered trademark of The Bank of Nova Scotia, used under license by, and is a division of, 1832 Asset Management L.P. Paycheque Portfolio™ is a trademark of The Bank of Nova Scotia, used under license. © Copyright 2023 The Bank of Nova Scotia. All rights reserved.

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Here are four key questions for advisors to consider in their retirement-planning discussions.

“For advisors, the ideal time to implement the Paycheque Portfolio approach is during that 'golden window,' stretching from five years before retirement to roughly five years into retirement – a period when many clients are already considering changes to their portfolio”

David De Pastena, Dynamic Funds Portfolio Solutions

1. Scotia GAM Investor Sentiment Survey, 2023.

How are you reducing longevity risk in your retirement income strategy?

What strategy is currently in place to deliver reliable income throughout your clients' retirement – especially in down markets?

How are you growing your business in the retirement space? How are you increasing your cash flow in your portfolios?

The Big Shift

+5 years

-5 years

High conviction

Golden Window

Accumulation

Decumulation

The strategy is also keenly focused on minimizing taxes. Building consistent income requires a special focus on maximizing after-tax cash flow. The more tax-efficient, the better. If we can withdraw less to get a dollar to spend in retirement, that helps to preserve capital and maintain the sustainability of income over the long term. With the Paycheque Portfolio approach, we see a greater focus on tax-efficient income sources like dividends, capital gains, and return of capital.

Time

Wealth