Generating Retirement Income

Generating Retirement Income

Crappy bond yields are putting a dent in your retirement plan.

Global economic growth is slowing and might slow down even more.

Healthcare is becoming more expensive.

At least low interest rates are keeping our real estate market in check.  For now.   Then again, new mortgage rules are here and more are on the way. Taking tons of equity out of your home isn’t the best option unless you live in downtown Toronto or Vancouver.  This is because you have to live somewhere.

These are not easy times for retirement planning (or income planning for retirement).

Today’s post will share some of my thoughts about how I’m going to generate retirement income.   But first, some retirement planning options to counter various financial headwinds.

Option #1 – Save more

I doubt most people will like this option but it’s probably necessary for many Canadians:  you’re going to need to save more than you think to fund your retirement.  This is especially true if you have no workplace pension of any kind to rely on.  Canadians are living longer on average and you’ll need money if you’re sticking around.  More money will help combat inflationary pressure, rising healthcare costs and longevity risk.  Which brings me to option #2.

Option #2 – Work longer

If you didn’t like option #1, you won’t like this one.  Working longer into your 60s or potentially your 70s might be the reality for a good percentage of Gen X and Y.  Part of the reasons these cohorts will need to work longer is because many Boomers remain in the workforce so they can fund their retirement.  That’s squeezing the job market.  Some Boomers are continuing to work because they enjoy it.  Some are continuing to work because they absolutely have to.

Option #3 – Spend less

The 4% rule tells us we should be “safe” to withdraw approximately 4% of our portfolio with a minimal chance of running out of money.  With the aforementioned crappy bond yields now, I think there needs to be some new retirement math.  With the ol’ 4% rule a retiree would need $1-million invested to produce a steady income of $40,000 a year.  Using 3%, which is much more realistic to me for today’s world, the same retiree would require a third more money – in excess of $1.3-million – to generate the same income. 

Such savings are likely impossible for most people to achieve unless they save early, save often, keep most of their assets in equities, don’t trade and keep their money management fees dirt-low for decades.  You’d be wise to follow that advice.  The reality is:  investing is simple but not easy.  Not many people seem to have a savings or investing or discipline gene these days.

Option #4 – Consider an annuity – really

As you probably know by now, stocks deliver returns but they also deliver risk.  Bonds are no picnic either since growth doesn’t usually come from bonds – you own bonds to protect capital not earn it.  Have you ever considered annuities to provide the fixed income you need?  Don’t count it out entirely.  Some portion of annuities can help older retirees to ensure they don’t outlive their savings.

While these four retirement options are available I’m looking at something different – dividend and distribution income.  In a nutshell, here is my plan to avoid working longer than I must, spending less money in retirement due to a lack of savings or buying an annuity.

Dividends and Distributions – Generating Retirement Income

I will invest in income generating assets and employ some sort of modified cash wedge in retirement while opening up the investment taps.  That might look something like this:

  • We intend to keep at least one years’ worth of basic living expenses in cash savings. That is likely somewhere up to $50,000.
  • After this one-year cash fund is tucked away in a high interest savings account, we will rely on the following for income beyond any workplace pensions:
    • Cash from dividend-paying stocks from Canada and the U.S.  (We will use the dividend income generated monthly and quarterly to pay for living expenses, keeping the cash buffer I mentioned above intact.)
    • Cash from a couple of low-cost, diversified, U.S. equity or dividend ETFs that pay distributions. Examples of those ETFs are VTI or HDV. (We will spend the distributions generated by our ETFs each month and quarter, and eventually draw-down the capital – likely our RRSP first.)

The equity bias to our portfolio should provide some steady cash flow AND some capital appreciation.   This is contrarian thinking since as you age, most gurus have long written about putting most of your assets into bonds as you get older.  I’m learning to live with stocks and so should you.

My math continues to tell me we’ll need about $30,000 per year in dividend income to fund our retirement dreams, excluding RRSPs and any workplace pensions.  I track that income every month.  Our plan is to keep saving and investing until we get there.

In closing there are a number of retirement strategies to consider.  I certainly didn’t list them all.  I’m not convinced I’ve figured everything out – far from it.  For now though I believe this is a decent starting point and a path we can focus on.

How did you arrive at your income destination?  How do you generate income for your retirement needs and wants?   Got a question for me?  Send it along!

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $600,000 now - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

20 Responses to "Generating Retirement Income"

  1. I still have the financial projections prepared for us by the banks, when we were 55. We spoke of retiring at 65 and estimated that we’d like to have about $60k to $70k of income, including cpp&oas. They ran the numbers and with a $65k withdrawal they said our savings would be depleted by the time we reached 75. If we cut back to $50k we’d make it to 85. Not a pleasant prospect. That’s when we got serious about our savings and looked for a better way to generate income for our retirement.

    I’ve mentioned many times the route we chose, and I’m repeating that our current projections continue to conclude that we will never run out of savings, rather that our capital will continue to grow. So it is never too late, but one has to take their retirement seriously and work to achieve the goals they set.

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  2. We never really had a “plan” other than to max the RRSPs, RESPs and TFSAs. Since DD got sick we also included contributions to her RDSP. We knew we would each have a modest DB pension so we never really came up with a set goal that we were aiming for. Have we saved too much? Possibly, but I have no issue with having options.

    I never really tracked portfolio income until I started reading MOA. Since then, I now track RRSP income and TFSA income to differentiate between the taxable and non-taxable. As of today, using a $1.33 U.S. conversion, the RRSPs are generating $57.4K and the TFSAs are generating $6.3K. I will be starting to remove approximately $14K/year from my RRSP this year to take advantage of the 15% tax bracket. I’ll probably just invest this money in a non-reg account or consider doing some efficiency renovations on the house to reduce energy needs. For now, I intend to take CPP at 60 (3.5 years from now). At 65 (10 years from now), DW will lose her wage replacement disability income, her disability CPP will change to regular CPP and drop substantially, and her DB pension will be reduced due to the integration factor so her RRSP will be converted to a RRIF to replace those. My DB will also be reduced due to integration but we will both get OAS at 65 so that will be a wash. All in all I think we’re in decent shape.

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    1. “We never really had a “plan” other than to max the RRSPs, RESPs and TFSAs.”

      That’s a great plan….and if you can execute on it…even better.

      “I never really tracked portfolio income until I started reading MOA.” Glad I’ve been helpful? 🙂

      If your portfolio (without any DB pension, disability income, government income via CPP or OAS) is generating $57.4k and $6.3k via RRSPs and TFSAs respectively – you’ve done a heckuva lot of smart things when it comes to investing – very well done.

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      1. A lot of it was luck. When I started investing in RRSPs it was because my Dad did. I didn’t know much about them other than it saved me taxes. But once I was in I was hooked. When I had a decent amount accumulated I sought out professional advice as I had little clue what I was doing. Even with professional advice I’ve made some bad moves (WPX and Crocus come to mind) but the good moves worked out well. Reading blogs like this and sites like Money Sense made me realize I still have a lot to learn.

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        1. Your Dad was wise to take advantage of tax-deferred mechanisms then. I continue to make mistakes, I just want to avoid huge ones as I get older 🙂 I still have lots to learn and for me that’s part of the fun that comes with the blog.

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  3. I think the main caveat with going the dividend income path (and I agree its the most viable route in today’s markets) in that while the 4% dividend income on the $1m looks good, when those stocks fall to $800k you are only getting $32k income instead of $40k. If people are prepared to deal with this, that’s fine. It requires a different mindset and an ability to return to work (or really tighten the belt) if everything goes sideways.

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    1. That’s a yield on cost argument. As long as the companies you own continue to pay dividends, whether your portfolio value is $1M or $500k, your income is steady.

      Take 100 shares of BCE for an example. BCE pays a dividend of $0.683 CDN per share right now. The share price is about $60. If BCE goes to $65 or $55 tomorrow, next week or next year, as long as the dividend stays at $0.683 the income to me is the same (100 shares x $0.683 = $68.30).

      Dividend investing does help with the mindset and emotions and I believe, at least for me, the more I can remove emotions when it comes to investing – the better!

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      1. So the key is picking companies that don’t decrease dividends during bad times? How can you know this when choosing the stocks? Based on past behaviour or based on other factors such as dividend payout ratio? Interested to learn of some resources.

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    2. That’s not exactly correct. In fact, dividend income can actually increase faster if the market drops if one DRIPs their investments. A person will get more shares for the same amount of money when the share prices drop thus increasing the total payout. Most companies I own have a fairly conservative payout ratio. Banks, for example, hover around the 50% mark so unless their income drastically drops, the likelihood of a dividend cut is fairly small. Now oil and gas earnings kind of took it in the teeth so ya, some of those dividends were cut.

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  4. Bingo. Very good post Mark.

    I think you’re right on all 4. Your plan seems very well thought out and appears appropriate for your goals and risk tolerance.

    1-3 are likely the new reality and option 4 might work for some people. I looked into for myself but decided against given the current payouts.

    HDV is part of my arsenal now.

    Lloyd and Cannew, you have both have very well indeed!

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    1. Thanks! I think 1-3 apply to most people, maybe myself included! HDV seems like a great product. I have to get working on the smart beta article for U.S. dividend ETFs. That’s my small project for November.

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  5. Local call-in radio station (CJOB) just had a younger guy call in and state he didn’t work any overtime because it put him in a higher tax bracket so it wasn’t worth it. This kind of thinking is probably all wrong. I always used any overtime to fill up the RRSP. Sure I had to wait until tax filing to get the funds back but it sits there sheltered for years and years. Maybe if the RRSP was full but even then I worked the O/T until I was darn near retired.

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    1. Too bad for that kid. I wouldn’t turn down work (more income in this case for that younger guy) unless my TFSA, RRSP were maxed out AND my mortgage was paid off. That’s just me though! I’m 2 for 3, I still need to work on the mortgage!

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      1. Agree but even with those 3 I wouldn’t have turned down additional income during my working days, even if bit of it was at a higher tax bracket. But I worked my entire life in a commission and bonus situation, and as an entrepreneur, so I have some difficulty understanding that kind of thinking. It’s possible the kid simply doesn’t understand the way taxes work and overestimated the implications.

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  6. Hi Mark,

    Those are some very reasonable points in the article. Unfortunately, given the low expected returns on equities and fixed income over the next decade, people would likely have to save more and cut costs ( lifestyle and investment) to the bone. This of course is not something that people want to hear.

    I expect to live off dividends in retirement, which will come from my investment portfolio. I will likely get Social Security in a few decades as well. This year I am spending my taxable dividends and side income, and saving my whole after-tax salary in my retirement accounts. My goal is to become as tax efficient as possible, so as to reduce tax waste. I may continue working indefinitely, for as long as I find it stimulating. That would likely prevent me from tapping into the nest egg.

    One thing that many bloggers talk about is that even “in retirement”, they will likely be earning some income. In the MMM case, or with Robb Engen’s too, I believe they earn enough from their side businesses to pay for expenses. Perhaps if the MOA franchise really takes off, you may find yourself in a situation where you won’t know what to do with your business income 😉

    Either way, creating options for your future self early in life is the ultimate goal, no matter where life takes us.

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    1. From what I’ve read on your site, your cost of living is rather low. This is going to be a huge enabler to you to retire younger than most.

      Our goal is also to be tax-efficient. This means we will likely smooth-out taxes over time.

      Yes, even in “retirement” I hope to have some sort of part-time job – likely the blog and something else. I figure we still need $30k per year in dividend income beyond that. As of this time next year, I hope we’re about halfway there. 🙂

      Continued success to you.

      Reply

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