The peak portfolio

As you cruise into your peak earning years—generally ages 45 to 55—your priorities change. And your portfolio needs to change along with them.

While the exact composition of your portfolio will always depend on your personal circumstances (your age, job security, how much you’ve saved, your tolerance for risk, etc.), it is possible to make some general points about how you should build a portfolio for this life stage, and what kinds of investments should be in it.

A time to build

One of your primary financial goals should be to ramp up your investment portfolio. You’re likely earning more, and may benefit from bonuses or other performance-related income. All of these things can make a big impact on the size of your portfolio.

At the start of your peak earnings years, a good initial savings target is between 10% and 20% of your after-tax income. As the years go by, your goal should be to steadily increase that target so you can continue to max out your RRSP, and contribute to a TFSA as well (and perhaps even to a non-registered account). By the time you reach 55, a savings target of 30% or more is not unreasonable.

Making the most of tax-sheltered accounts

Over the past several decades, many time-tested tax shelters have been eliminated. There are two big exceptions: your RRSP, and your TFSA. Peak earners need to take full advantage of these tax-sheltering opportunities. The additional compounding power offered by years of tax-free growth is simply too great to ignore.

That said, advisors and planners continue to debate whether an RRSP or a TFSA is a better choice. It’s not always an easy question to answer: the calculation depends largely on your individual financial circumstances, and your expected income during retirement.

Growth vs. income

The investment focus of your peak earnings years should be growth, at least in the first several years. That means a higher allocation to equities than later in life—since there are still several years before you need to withdraw from your portfolio for income, you’re in a better position to ride out the extra volatility of stocks.

That said, equity investments need not be a high-risk proposition. There are plenty of conservatively managed mutual funds and ETFs that invest using a protection first mindset. In addition, blue-chip companies with histories of increasing their dividends make excellent core holdings for most peak portfolios.

Depending on the size of your portfolio and your tolerance for risk, you could supplement that position with investments in small-cap or emerging-market stocks, or in commodities. And, higher-net-worth investors may want to consider hedge funds that can make long or short bets on various assets.

As you transition out of your peak earnings years (say, after age 55), your focus will be more balanced: growth and income will be equally important, and you’ll need to gradually increase exposure to income-producing assets. It makes sense to include these assets in tax-sheltered accounts (RRSPs, TFSAs), in order to shield them from tax.

Safety vs. risk

The 2008 stock market meltdown made it clear many investors’ risk tolerance is a lot lower than they thought it was. Add to that a real possibility of losing a job and a lack of income stability, and you understand why some peak earners would much rather invest in GICs, Treasury Bills, and other guaranteed investments.

However, such an approach comes at a considerable cost. The low-interest-rate environment has depressed returns from so-called safe investments to the point where they now barely exceed the rate of inflation.

In the long term, an overallotment to these types of investments can suppress the performance of your peak portfolio—potentially to the point where it is insufficient to sustain your retirement.

Bottom line: guaranteed investments do have a place in the peak portfolio. But for most peak earners, these should take a backseat to growth-oriented investments—no more than 20% to 25% of the portfolio in most cases. That way, you’ll be better positioned when you exit your peak earnings years and enter the home stretch toward retirement.