Our bucket approach to earning income in retirement
Asset accumulation seems easy but what about asset decumulation? The solution might be: you might want to consider a bucket approach to earning income in retirement.
One of my favourite books about generating retirement income is one by Daryl Diamond, The Retirement Income Blueprint. This is one of the best I’ve read.
It is my hope to start exploring this subject more on my site – including for my own benefit – to figure out what earning income in retirement can and needs to look like for us.
Here’s the modified bucket approach we’re considering below: how to organize our personal portfolio to address certain income needs and manage some market risks in three (3) buckets:
- cash savings
- income from dividend paying stocks
- distributions from and selling equity Exchange Traded Funds (ETFs) over time.
Quick notes: The best approach for any one person or couple will depend on a host of factors that one My Own Advisor blogpost cannot include nor standardize.
Bucket 1 is cash savings. It’s simply a large emergency fund we don’t have to use but it’s there if we need it.
Bucket 2 is earning income from dividend paying stocks. Income will be earned inside some key accounts (such as our non-registered account(s), TFSA(s), and RRSPs) to pay for living expenses.
Bucket 3 is earning income from equity ETFs. This income will come from mainly our RRSPs, as we intend to “live off dividends and distributions” and withdraw capital from our RRSPs/RRIFs over time as we work part-time.
The purpose of having buckets is simple but effective: this retirement bucket strategy is an investment approach that segregates your sources of cash or income into three buckets. Each of these buckets has a defined purpose based on what or when the money is for: now, (short-term), intermediate (near-term) or long-term (multi-year or decade).
My approach is a bit of a deviation: I don’t want to use cash savings in the short-term unless I have to with the combination that I won’t be forced to sell assets/stocks during a down market to fund your annual withdrawals.
How to Use the Retirement Bucket Strategy
You’ll need a plan for your retirement income bucket strategy. Here are some considerations…
The Immediate (Short-Term) Bucket
Cash and other liquid investments are in the immediate, or short-term, bucket. These investments include cash or GICs or similar assets. You’ll fill this bucket with investments that are liquid – easy to access for spending without much tax complications. The goal of this bucket is not income – rather – to reduce investment risk.
Ideally, some experts suggest you’ll want to hold enough cash in the immediate bucket to pay for up to two years of expenses. So, if you plan on spending $50,000 per year in retirement, then you’ll want to try and reach $100,000 in this bucket.
I prefer just $50k for us.
The Intermediate (Near-Term) Bucket
This middle bucket is usually designed to cover expenses in the years 3-5 or maybe up to years 3-10 for your expenses. Money in the intermediate bucket should be expected to grow.
Considerations include common stocks, longer-term maturity bonds, and potentially some growth stocks although even in a 3-5 year span – growth could be hard to come by!
The Long-Term (Multi-Year) Bucket
Long-term investments are those that mimic historical stock market returns – ideally measured in decades to recover from any near-term storms. These assets are intended to grow your nest egg.
For any multi-year or ideally multi-decade investing time horizon, you might want to consider plain vanilla ETFs or a diversified portfolio of stocks.
Some other retirement income factors and assumptions
Government benefits – CPP and OAS
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. Here is some general information on CPP and OAS:
Throughout 2016, the maximum CPP retirement benefit for new recipients at age 65 was about $1,100 per month. CPP benefits are adjusted once a year, in January, based on changes over a 12-month period related to the Consumer Price Index (CPI) – the cost-of-living measure used by Statistics Canada.
Throughout 2016, the basic OAS pension for recipients aged 65 was about $570 per month. OAS benefits are also based on the CPI but are reviewed and revised quarterly.
Given both government benefits include some inflation protection (CPI) I personally consider CPP and OAS very bond-like.
For this reason we have a tilt towards equities in our personal portfolio and likely always will. This tilt exposes us to more market volatility but it should also provide us with better (higher) longer term returns than fixed income.
When to take CPP or OAS?
I’m not sure when we will take CPP or OAS. It will depend. As we get closer to determining our income needs we’ll figure it out. Ideally, we’d like to be able to “live off dividends” covering basic living expenses without CPP or OAS income. This will allow us to defer CPP or OAS, earn more fixed income as we get older by deferring those benefits, and potentially help manage our taxes accordingly.
Very conservatively I would think as a couple we’ll earn about $12,000 per year (each) from CPP and OAS in our 60s.
Workplace benefits – pensions
My wife and I are both very fortunate to have some workplace pensions to draw from in our future. I have not included this in our table above. Although these pensions are secure the income from them has yet to be fully determined.
Conservatively, I anticipate my pension income will be a few thousand per month eventually. This pension is adjusted to inflation.
I anticipate my wife’s pension will be less but again a pension is a gift. I suspect her income will be $15,000 per year starting at the same age.
If we decide to semi-retire from the workforce we’ll need money to close the income gap between leaving full-time work and when these pensions will kick in.
Personal benefits – working in retirement?
Isn’t retirement supposed to be about not working?
It can be. Not for me.
My wife knows I never plan to retire in the traditional sense. I intend to work as long as I’m physically and mentally able to, into my 60s, 70s and maybe beyond. This may or may not be for any money at all.
I believe working on your own terms can have a number of benefits.
The gents who wrote Victory Lap Retirement can likely attest to that. There can be social, physical and mental growth that comes from working. In that book, the authors highlight some form of “victory lap” career (i.e., working on your own terms) can provide a number of benefits when the main motivation is gone – you don’t need the money.
Financial independence can provide a number of benefits whether you decide to retire early or not. Working on your own terms can be in the form of working part-time, working seasonally, starting your own business or volunteering your time and skills. As they say working can be better when you don’t need the money. I hope to experience that someday….
What does the bucket approach work?
A few reasons come to mind:
1. There is less need/urgency to navigate any sequence-of-returns risk – selling assets after they have fallen in price. You have 1 or more years’ worth of cash to curb that risk. Most historical evidence suggests a bear market – which is a deeper, longer decline in value than a correction – tends to last up to 18 months.
Other source: List_of_stock_market_crashes_and_bear_markets
2. I believe it’s comforting. Retirees don’t need to worry about the possibility of having to liquidate assets at a bad time and therefore this helps investor behaviour via psychological safety.
3. I believe it’s easy to implement. No portfolio rebalancing and you only need to keep a modest cash wedge relative to your total portfolio value.
Our bucket approach to earning income in retirement summary
We believe our bucket approach for earning income in retirement will be robust and will provide us with options. If you haven’t already gleaned this from my article, you’ll notice we’re saving and investing diligently on our own now regardless of what might be in store for us (government or workplace benefits). We’re doing this because we believe this is the best approach for us. Ultimately you need to determine what’s best for you personally and financially.
I wish you well.
Stay tuned to more blogposts on this subject and as my thinking matures.
What’s your income plan for retirement? Do you have one? Are you already there and are you accomplishing your needs and wants? Drop me a comment and share your thoughts.