“There are many concepts and well-known rules of thumb for the accumulation years that do not apply in the same way, or apply at all, in the income years. Some of the traditional approaches are, in fact, detrimental to creating the most efficient income stream. Planning retirement income is a very different art and science than planning the accumulation of assets, and there are few advisors who are proficient in it. That is what is missing for consumers.” – Daryl Diamond, author of Your Retirement Income Blueprint, retirement income specialist
When a person retires they might go from one main source of income (employment income) to three, four or many more sources of cash flow (pensions, Canada Pension Plan (CPP), Old Age Security (OAS), personal investment assets, just to name a few). What income streams should be accessed in what order? What assets should be used up first and still others deferred until later? How can less tax be paid? Answering many of these questions is the goal of Your Retirement Income Blueprint by Daryl Diamond.
No doubt everyone has a different reason to retire or even semi-retire, and it must come down to a personal assessment related to:
- Lifestyle objectives
- Cash flow needs
- Family issues
- Health issues
There are many financial rules of thumb for retirement but these may or may not apply to you. There are also many strategies you could employ as part of retirement planning. This is why Diamond says you need an income blueprint – because to retire, you need to pay for it, in advance.
Laying the income foundation
In Your Retirement Income Blueprint Diamond shares a six-point plan to arrive at the income objective needed for retirement. Those six steps are as follows:
- Assessing your current life stage – this includes assessing at what stage you are at in the retirement cycle (positioning yourself, in early retirement, changes in health, other).
- Establishing your lifestyle and time objectives – this includes assessing how you feel about retirement, what role might work play, what activities will you be engaged in to maintain physical and mental well-being, and more.
- Determining your financial goals and priorities – this includes assessing changes to cash flow (from employment income to other sources of income) and focusing on your net, after-tax income needed.
- Creating your income needed through layering – this includes assessing projected government benefits, and devising a game plan to use the least tax-efficient sources of income first in lower tax brackets (such as CPP, OAS, pension income, interest from non-registered assets, Life Income Funds (LIFs), and Registered Retirement Income Fund (RRIF) payments to name a few).
- Aligning your investments with your income plan – includes devising the “balancing act” to preserve assets while using them to fund your retirement lifestyle; selecting growth assets to combat inflation and continually revisiting your assumptions as you move through different life stages.
- Assessing the impact of your plan on your net worth – includes assessing those assets that will derive meaningful cash flow (not houses, not cars, or other material possessions).
Here is a list of some of my favourite takeaways from Diamond’s book:
Always focus on what you can control: your asset allocation, your investments that will create income, your investment costs, understanding your tax bracket and what assets you use early and those you defer until later. Do not focus on the stock market, interest rates, inflation, currency changes or other people’s behaviour.
Consider implementing a Cash Wedge: an income model that maintains a modest amount of cash for short-term expenses AND follows a profit-selling-process WHILE maintaining your desired asset allocation. You can read about my Cash Wedge approach here.
Consider taking Canada Pension Plan (CPP) early: remember the first rule of layering your income – use the least tax-efficient sources first – this includes CPP. If you are retired, take the CPP payment rather than your own personal assets to generate income.
Consider a Life Income Fund (LIF) from your commuted pension plan: the income from a LIF can be quite flexible; “LIFs follow the same minimum withdrawal formula that applies to RRIF accounts.” This way you can select an income stream anywhere between the minimum and maximum withdrawal limits.
A RRIF is the most common and practical option for delivering income from RRSP accumulations: RRIFs can provide a variety of income options, an ability to make lump-sum withdrawals, greater flexibility than an annuity, and provide a smooth transition from RRSPs.
“The prolonged deferral of RRSP and other registered money can possibly lead you into a tax trap as you progress into your late 60s and beyond.” Consider taking out additional taxable income even though it is not needed for cash flow and move contributions to a Tax Free Savings Account (TFSA). This strategy is particularly effective before age 65 so you don’t erode any Old Age Security (OAS) benefit.
“I look for ways to help retirees fund their TFSA accounts to the maximum, whether that be through taking CPP early, withdrawing additional amounts out of registered accounts or even moving other non-registered holdings systematically into them.” – Daryl Diamond
Retirement headwinds and more…
In the book Diamond also highlights three headwinds retirees best be savvy about and prepare for: taxation, inflation and fees.
Overall, I think Diamond does an impressive job at laying out the numerous considerations for retirees (and would-be retirees) in Your Retirement Income Blueprint. Anyone wanting to get a broader perspective on retirement income will be best served at picking up a copy of this book and reading it cover to cover, a few times over, and keeping it for years to come as part of their personal finance reference library.