CSC (AACN): Retirement Income and a Concentrated Portfolio

Before age 65: No pension or CPP/OAS yet. The portfolio must fund the full $95,000 a year for three years: $95,000 × 3 = $285,000 That is about 23.8% of the $1.2 million portfolio and must be available in the near term.

After age 65: Pension $55,000 + CPP/OAS $28,000 = $83,000 Portfolio withdrawal needed = $95,000 − $83,000 = $12,000, indexed at 2.5%. On $1.2 million, that is an initial withdrawal rate of 1.0%.

Required return: After 65, the portfolio needs to cover only a small gap plus inflation and fees. A return of roughly inflation plus fees, or about 3% to 4% nominal, is sufficient over time. Before 65, the need is liquidity, not high return; the $285,000 bridge should be in short-term bonds, GICs, or cash equivalents.

Capacity versus willingness: Capacity is high because the DB pension covers most essential spending and the portfolio withdrawal rate is low. Willingness is low: they sold equities in 2022 and describe themselves as moderate. An 80% equity allocation is inconsistent with their demonstrated behaviour and with the three-year bridge. The 55% concentration in five bank and energy stocks adds uncompensated risk. A moderate allocation is appropriate, but not 80% equities.

Target allocation:

• 50% to 55% equities, globally diversified, with no more than 5% in any single stock and no more than 15% in any one sector.
• 35% to 40% fixed income, including a GIC ladder or short-term government bonds for the bridge period.
• 5% to 10% cash and short-term reserves, enough to cover at least two years of withdrawals.

Bridge fund: Carve out $285,000 for the three years before pension and CPP/OAS begin. Hold it in a GIC ladder maturing annually or in short-term government bonds. Do not expose the down-payment-equivalent money to equity risk.

Reducing concentration:

• Sell the concentrated stocks inside the RRSP and TFSA first. Those accounts do not trigger immediate capital gains tax on sales, so diversification can begin there at low tax cost.
• In the taxable account, spread sales over two tax years if capital gains would push them into a higher bracket. Use available capital losses to offset gains.
• If the couple makes charitable gifts, consider donating shares in kind rather than selling first, subject to tax advice.
• Reinvest proceeds into a diversified portfolio and set a written rule that no single stock may exceed 5% after rebalancing.

Risk controls: Rebalance with 5% bands, review the IPS annually, and keep the $30,000 emergency fund separate from the retirement portfolio.

Behavioral risks:

• Recency bias: the 2022 decline is still fresh, so the couple may be tempted to sell equities after a drop.
• Loss aversion: they may focus on short-term losses rather than long-term income.
• Home bias and familiarity: the bank and energy concentration feels safe because the names are familiar, but it is undiversified.
• Anchoring: they may anchor to the portfolio's past value or to the dividend income from the concentrated stocks.

Sequencing risk: Retiring into a weak market while withdrawing from equities can permanently impair the portfolio. The three-year bridge and a cash reserve reduce the need to sell equities in a downturn.

Specific IPS rules:

1. Hold two years of planned withdrawals in cash or short-term bonds.
2. Rebalance to target weights when any major asset class moves more than 5 percentage points from target.
3. No single stock may exceed 5% of the portfolio; no single sector may exceed 15%.
4. Withdraw from cash and bonds first in a down equity market; do not sell equities to fund spending after a decline of more than 10% until the cash reserve is used.
5. Review the plan annually, but do not change the target allocation in response to short-term market moves without a documented discussion.
6. Pre-commit to a withdrawal rate and inflation adjustment, and revisit only if the funded ratio changes materially.