How to Invest Your Retirement Savings in Canada: The Modern 'Bucket' Strategy

From safe havens to strategic growth, learn how to make your savings last.

For generations, the conventional wisdom for retirement investing was simple and cautious. As you approached your retirement date, the prevailing advice was to transition all your funds into "safe" assets. The goal was to protect your nest egg from market volatility, ensuring it was preserved for a steady, secure retirement. This strategy, often known as "lifestage investing," relied on low-risk assets like government bonds and GICs, providing a predictable, albeit modest, return. This approach worked well when life expectancies were shorter and pensions were more common, but in today's world, it presents a significant challenge: the risk of outliving your money due to inflation and low returns.

The Shift: The New Retirement Investing Strategy

A new, more dynamic strategy has emerged to address the realities of modern retirement. Known as the "bucket" or "time-horizon" strategy, it's designed to provide both security and growth. Instead of a single, safe portfolio, your retirement savings are divided into different "buckets" based on when you plan to use the funds. This strategy acknowledges that not all of your money is needed on day one of retirement.

Understanding the Bucket System

The core of this strategy involves creating two distinct buckets:

• Bucket 1: The Short-Term Cash Reserve. This bucket holds enough money to cover your living expenses for the next 3 to 5 years. These funds are placed in safe, liquid investments like high-interest savings accounts, GICs, or money market funds. The purpose is to create a secure buffer that you can draw from without needing to sell assets during a market downturn.
• Bucket 2: The Long-Term Growth Fund. The rest of your savings goes into this bucket. These funds are invested for long-term growth in a diversified portfolio of assets like stocks, equity ETFs, and real estate investment trusts. Because this money won't be needed for several years, it has time to recover from market fluctuations and continue to grow, helping your portfolio keep pace with inflation and ensuring your money lasts throughout a long retirement.

A Practical Example: John's Retirement

Consider John, a Canadian who retires at age 65 with a $1,000,000 portfolio, with plans to withdraw $40,000 per year for 25 years. Let's compare the old and new strategies.

*Note: These are simplified estimates for illustrative purposes. Returns and annual withdrawals were compounded without considering a refill strategy. The calculator below provides a more detailed breakdown.