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.
How are you going to generate retirement income?
At least low interest rates are keeping our real estate market in check. For now.
I have no doubt real estate might rocket higher thanks to low interest rates. But, you have to live somewhere so taking the equity from your home might not be the best option.
These are not easy times for retirement income planning.
Today’s post will share some of my thoughts about how I’m going to generate retirement income.
But first, some general retirement planning options to consider:
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.
Generating Retirement Income via Dividends and Distributions
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:
- Bucket #1 – we intend to keep about one years’ worth of basic living expenses in cash savings. That is likely somewhere up to $50,000.
- Buckets #2 and #3 – we will rely on the following for income beyond any workplace pensions:
- Income/cashflow 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.)
- Income/cashflow from a couple of low-cost, diversified, U.S. equity ETFs. One example of that is U.S. ETF VTI. (We will spend the distributions generated by VTI and eventually draw-down the capital inside our RRSP over time.)
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.
How to generate retirement income
My math continues to tell me we’ll need about $30,000 per year in dividend income to fund the basics in our retirement dreams.
That income stream ignores any RRSP assets, does not include any workplace pension income, and also excludes government benefits in the form of CPP and OAS.
In closing there are a number of retirement income 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!