Sarah, a 62-year-old retired executive in Ontario, has a portfolio of $2.5 million earmarked for retirement decumulation. Her financial plan assumes an annual withdrawal rate of 4% ($100,000) adjusted for inflation. The portfolio is currently allocated 50% equities and 50% fixed income. She holds a significant position in a Canadian mega-cap bank stock, which represents 15% of her total portfolio, due to its historical dividend growth and her familiarity with the company. Her Statement of Investment Policy (SIP) targets a maximum individual stock exposure of 8%. Considering her decumulation phase and risk profile, what is the most appropriate action for her portfolio manager to take regarding the bank stock holding?

Question: Sarah, a 62-year-old retired executive in Ontario, has a portfolio of $2.5 million earmarked for retirement decumulation. Her financial plan assumes an annual withdrawal rate of 4% ($100,000) adjusted for inflation. The portfolio is currently allocated 50% equities and 50% fixed income. She holds a significant position in a Canadian mega-cap bank stock, which represents 15% of her total portfolio, due to its historical dividend growth and her familiarity with the company. Her Statement of Investment Policy (SIP) targets a maximum individual stock exposure of 8%. Considering her decumulation phase and risk profile, what is the most appropriate action for her portfolio manager to take regarding the bank stock holding?

Answer options:

• Immediately sell down the bank stock to meet the 8% target and reinvest the proceeds into a diversified equity ETF to reduce concentration risk.
• Maintain the current position, noting its consistent dividend income, and instead adjust other equity holdings to balance risk. ✅ Implement a phased reduction of the bank stock over 12-18 months to mitigate market impact and potential tax implications, reallocating proceeds to a broad market equity fund.
• Use a covered call strategy on the bank stock to generate additional income, while delaying any selling until market conditions become more favorable.

Correct answer: Implement a phased reduction of the bank stock over 12-18 months to mitigate market impact and potential tax implications, reallocating proceeds to a broad market equity fund.

Explanation: While reducing concentration risk is important, a phased approach to selling a significant appreciated position like the bank stock minimizes market impact and allows for tax planning, aligning with the decumulation phase goals. Immediate selling may incur substantial capital gains tax in one year, disrupting cash flow.