How to extend the life of your retirement fund

The “Cash Wedge” approach helps sustains retirement portfolios in withdrawal mode.

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(Photo: Getty Images)

About 75% of retirees in Canada withdraw capital from their investment portfolios, according to data cited by Daryl Diamond in his newesr book, Your Retirement Income Blueprint. The rest are reliant on government programs like CPP and OAS, or else live off interest and dividends from their portfolios.

For retirees making withdrawals from capital, a big concern is running out of funds too soon. Diamond, a retirement-planning specialist, offers readers a solution he has used with his clients since 1993. Called the “Cash Wedge,” it seeks to extend the income-generating ability of a retirement portfolio by avoiding withdrawals on assets that are down in value, and using withdrawals to rebalance to the retiree’s strategic asset allocation.

The approach structures the fixed-income portion of a diversified portfolio to include the following three items: a cash position, a 1-year GIC and a 2-year GIC, each representing one year of expenses for a total of three years. This represents the wedge.

If stocks are having a bad year, the maturing GIC is allowed to replenish the cash position used up during the year; if stocks are having a good year, a chunk is sold to replenish the cash position (the maturing GIC is rolled into another GIC). Also, surplus cash from the sale of stocks is funnelled into asset classes that are flat or down. Within this framework, Diamond recommends a withdrawal rate of about 5% annually.

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