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!