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By Mark Seed, MyOwnAdvisor
Special to the Financial Independence Hub
I’ve updated this retirement income planning post to reflect some current thoughts. Check it out!
I’ve mentioned this a few times on my site: there is a wealth of information about asset accumulation, how to save within your registered and non-registered accounts to plan for retirement. There is far less information about asset decumulation including approaches to earn income in retirement.
Thankfully there are a few great resources available to aspiring retirees and those in retirement – some of those resources I’ve written about before.
Retirement income and planning articles on my site:
An article about creating a cash wedge as you open up the investment taps.
A review about The Real Retirement.
These are six big mistakes in retirement to avoid.
A review of how to generate Retirement Income for Life.
This is my bucket approach to earning income in retirement.
Here are 4 simple ways to generate more retirement income.
Can you have too much dividend income? (I doubt it!)
Other resources and drawdown ideas:
Instead of focusing on the 4% rule, you can drawdown your portfolio via Variable Percentage Withdrawal (VPW).
A reminder the 4% rule doesn’t work for everyone. Some people ignore the 4% rule altogether.
Getting older but my planning approach stays the same
As I get older, I’m gravitating more and more this aforementioned “bucket approach” for retirement income purposes. This bucket approach consists of three key buckets in our personal portfolio to address our needs:
- a bucket of cash savings
- a bucket of dividend paying stocks
- a bucket of a few equity Exchange Traded Funds (ETFs).
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.
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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.
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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.
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).
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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.
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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. Continue Reading…
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