Overlooked retirement income and planning considerations

The table above highlights with modest retirement expenses, we should be able to live off a portfolio of approximately $1 million once we’re debt free – via “living off dividends”.

You’ll note in my income table above, I have not yet included any Canada Pension Plan (CPP) income or Old Age Security (OAS) income in these tables. No doubt many older Canadians including myself will earn some from each.

Assuming some CPP and OAS benefits may flow their way to you, I thought I would outline some overlooked retirement income and planning considerations in no specific order.

1. Treat government benefits like CPP and OAS as fixed income

Again, you’ll see in my income above there is no mention of any Canada Pension Plan (CPP) income or Old Age Security (OAS) income. That’s because while we expect this income to fund some of our retirement needs – it’s more of a safety net. Given both government benefits also include some inflation protection (CPI), I personally consider CPP and OAS very bond-like. For this reason, I have a tilt towards equities in our personal portfolio and likely always will. This tilt exposes me/us to more market volatility but it should also provide us with better (higher) returns over time than fixed income.

I believe the more you can tilt your portfolio to hold more equities during retirement, including those that pay dividends or distributions, the more retirement income you could potentially generate.

2. Treat workplace pensions as another form of fixed income

My wife and I are both very fortunate to have some workplace pensions to draw from in our future. My pension is a defined benefit pension plan. That means my benefits (income) is defined in my financial future based on my contributions now. My wife’s plan on the other hand is a defined contribution pension plan. That means her contributions are defined today but her total portfolio value at the time of retirement is at the mercy of market success using certain investment funds. We have not included our pension in the above table.

Although these pensions are for the most part secure, the income from them has yet to be fully determined.  Anything can happen in our financial future so we save and invest on our own to supplement any pension risks.

For the same reasons above, if you have a workplace pension you can rely on, certainly a defined benefit pension plan, I would consider this pension a “big bond”.

This is another reason to have an equity tilt in your personal portfolio. I would consider taking on more investment risk for more potential reward in your portfolio to increase retirement income; using stocks or low-cost equity Exchange Traded Funds (ETFs).

3. Be ready to manage the psychological shifts with asset decumulation

Up to now, you’ve been busy saving and investing in your asset accumulation years. You’ve been told to “SAVE FOR RETIREMENT!”, “PLAN AHEAD, YOUR FUTURE SELF WILL THANK YOU!”, and more.

Asset decumulation years will be totally different.

In retirement there is likely no longer a mortgage to pay (at least this is our plan). Entering retirement, if you have kids, they might have left the house now. That means helping them financially with their post-secondary education costs is no longer needed.

In retirement you no longer have wardrobe expenses for work. You don’t have the same commuting costs. My point is – you might have more money than you think!

I believe one easy mistake many folks planning for retirement makes – is any estimate on how much you need to save to retire. If someone needs $50,000 per year and has saved $1 million for retirement, they may think their savings will only last 20 years. That couldn’t be further from the truth.

While the 4% rule isn’t perfect it remains a very good rule of thumb.

$1 million generating 4% will of course generate $40,000 in the first year, meaning a $50,000 withdrawal will reduce the account balance by just $10,000. Depending upon how your money is invested, and any future sequence of returns, $1 million may support $50,000 of annual withdrawals for 30 years or more.

In fact, things could be so successful that 50% of the time using the 4% rule, you will “double your wealth”. So, 50% of the time (market returns willing) you will finish with almost X3 wealth on top of a lifetime of spending using the 4% rule.

I suspect for many Canadians when people go from saving aggressively using their RRSP to converting some or all of these assets into a Registered Retirement Income Fund (RRIF), there’s a major psychological shift that occurs. This is because retirees feel the need to maintain the value of the assets they’ve worked so hard to build. This psychological shift might be difficult for some retirees to overcome.

The reality is, even a modest RRSP/RRIF portfolio of $400,000, saved up by age 65, that portfolio value inside an RRSP can generate some decent retirement income. Combine this income with other assets and any government benefits in the form of CPP and/or OAS which can begin at age 65 – investors’ may not need to worry about not having enough – depending upon their income needs to cover expenses of course.

To help you with your psychological shift – play with a few FREE retirement calculators such as my personal favourites here. 

You could start withdrawing $25,000 per year from your RRIF at age 65, and more over time to combat inflation, and have little risk of running out of money before age 90.

4. Tax efficiency is important but not everything

Unlike your current working years or years leading into retirement, taxes will often not be withheld at the source like they are with employment income. By planning the accounts that should be drawn down first, investors can alter and potentially optimize the amount of tax they must pay. Investors can absolutely smooth out taxes over time and ensure they are not incurring a huge tax bite in their later years – when dependable retirement income might be vitally important for health reasons.

In running various financial projections over the years, I’ve found the following drawdown order seems to be a good default:

Draw down any taxable accounts first > then *TFSA assets > then RRSP assets.

*Of course, you can swap the RRSP for the TFSA in the second spot but that decision may depend on how much assets you’ve accumulated in each account along with any estate planning considerations.  

Mind you, financial decisions shouldn’t be made on tax implications alone.

For what it’s worth, even though we’re in our 40s, we believe the following withdrawal strategy will help optimize the taxes we might pay during retirement:

A. Regarding non-registered accounts

• In our 50s and 60s, spend income from this/these accounts to cover retirement or semi-retirement expenses.
• By our early 70s, exhaust all non-registered assets.

B. Regarding RRSPs/RRIFs

• In our 50s and 60s, we’re going to do something unconventional – start withdrawing assets from our RRSPs. This will help smooth out taxes given other assets we hold.
• In our mid-60s, we will consider taking CPP and/or OAS government benefits. There is the real potential for us to delay our CPP and/or OAS until age 70.

A reminder these are some of the key reasons for taking your CPP and OAS as late as possible:

• you don’t necessarily need the money to live on now (consider exhausting RRSP assets before age 65 or 70);
• you have good reason to believe that you have a longer-than-average life expectancy (we hope so!);
• you are concerned about market risk to your savings portfolio (yes, as we get older in our 50s, 60s and 70s, I don’t want to deal with finances as much since this shouldn’t be the time to worry about money);
• you aren’t concerned about leaving a large estate – so you use up some or all personal assets before taking government benefits (correct).

More reading on CPP and/or OAS deferrals:

Here’s when you should consider taking your Canada Pension Plan (CPP).

Should you consider deferring your Canada Pension Plan?

C. Regarding TFSAs

• In our 50s and 60s, exhaust all other accounts except TFSAs.
• By our early 70s, our plan is to live off income from our workplace pensions, government benefits and TFSA income. If we continue to maximize contributions to this account like we have been doing, every year since inception, it’s not unrealistic that in 30 years our TFSAs will be earning tens of thousands of dollars per year; money that can be withdrawn tax-free.

Here are some of the great things you can do with your TFSA to generate this portfolio value.

What I am trying to say is, with all of this, by planning the accounts from which retirement income with flow from you can exert some control over your income taxes to be paid.

5. Like taxes, death is part of life and planning for it is important

Sadly death will happen to all of us. This makes planning for it important for your spouse and family as part of estate planning.

Related to taxes, based on my readings, pre-retirees tend to overestimate the tax they will pay in retirement. Someone earning $100,000 of salary will generally pay 25-30% average tax depending on their province or territory of residence, and 35-45% marginal tax on their next dollar of earnings. In retirement, someone with $50,000 of income would pay at most 15-20% average tax across the country, and depending on the sources of income, it could be close to zero! Income like eligible pension income, capital gains, and Canadian dividends are eligible for tax credits or reduced income inclusion rates. Married couples can also split income more easily in retirement to minimize their combined family tax.

If you want to know how best to structure your accounts, to name beneficiaries for tax planning and estate purposes, check out this comprehensive post here:

When it comes to life insurance, I wrote about a number of life insurance products in plain language here.  I believe retirees need to consider liquidity requirements for the spouse or family to pay off all debts and/or replace any income that would stop upon death.

Retirees also need to identify their Powers of Attorney (PoAs) and executors, including what’s going to happen if they’re incapacitated.  Retirees should strongly consider keeping a list of financial information that is current; documenting bank accounts and investment accounts and pension accounts in an easy-to-find location for their family members.

Learn all about Wills and get a promo code in fact, to update your own Will, from this article here. 

Overlooked retirement income and planning considerations summary

If you haven’t already gleaned this from my article I hope you’ve noticed a few things above:

• We’re far from being retired yet but we feel the importance of planning for it. This makes the process of any retirement planning far more important than the real outcomes that might occur years from now.
• We’re looking at our retirement plan as a holistic exercise that includes elements like taxation impacts, estate planning and more beyond generating retirement income. Not everything is adequately accounted for yet including our estate planning and end-of-life plans.

We’re thinking about these things because we believe it’s the right stuff to think about. Ultimately you need to determine what’s best for you personally and financially. I hope these overlooked retirement income and planning considerations have helped you out.

Stay tuned to more blogposts on retirement income and planning as my thinking matures.

What’s your income plan for retirement?  Do you have one?  Are you already there and accomplishing your needs and wants? 

Further Reading:

There are also dozens of Retirement stories and essays you can learn from here.

Enjoy some FREE retirement calculators such as my personal favourites here. 

Don’t forget healthcare in retirement. Here are some healthcare benefits for retirees to consider.

Mark Seed is a passionate DIY investor who lives in Ottawa.  He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on June 21 2021 and is republished on the Hub with his permission.