Overlooked retirement income and planning considerations
I’ve updated this overlooked retirement income and planning considerations to reflect some current thoughts now that interest rates are higher in 2023. Check it out!
I’ve mentioned this a few times on my site: there is a wealth of information about asset accumulation, how to save within your registered and non-registered accounts to plan for retirement. There is far less information about asset decumulation including various approaches to earn income in retirement.
Thankfully there are a few great resources available to aspiring retirees and those in retirement – some overlooked retirement income and planning considerations I’ve written about before:
That was an excellent book, encouraging all retirees to consider the following for any retirement:
- Lifestyle objectives
- Cash flow needs
- Family issues
- Health issues
This was my article about creating a cash wedge including our potential approach.
In that book, some considerations for structuring your retirement income pillars:
- Pillar 1 is the Old Age Security (OAS) pension and its companion program, Guaranteed Income Supplement (GIS).
- Pillar 2 is the Canada Pension Plan (CPP).
- Pillar 3 includes your mix of tax-assisted vehicles such as Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs) and other accounts.
- Pillar 4 includes other assets accumulated over your lifetime such as your primary residence, vacation property (if you are lucky to have one), or stocks held with your brokerage firm in a taxable account.
In this Vettese book he suggests to consider two or more of these approaches for asset decumulation:
- Invest in passively managed funds to lower your investment costs and fees over time – keeping more of money working for you (versus in the hands of advisors of financial companies).
- Start your Canada Pension Plan (CPP) later in life – something I wrote about here.
- Use some (not all), maybe between 25-50% or so of your RRIF assets to purchase a non-indexed annuity.
- Make adjustments to your spending habits. In “good times” when the market is hot (like 2017 was), consider spending more. In bad times, when the market declines for a couple of years or remains flat, consider spending less. That is the Variable Percentage Withdrawal (VPW) approach.
- Consider the “nuclear” option of using a reverse mortgage, later in life.
Our retirement income and planning considerations
As I get older, I’m gravitating more and more this aforementioned “bucket approach” for retirement income purposes.
My bucket approach consists of three key buckets in our personal portfolio to address our needs:
- a bucket of cash savings
- a bucket of dividend paying stocks
- a bucket of a few equity Exchange Traded Funds (ETFs).
Bucket 1 Cash Savings
Simply put, life happens.
So, to help with emergencies in semi-retirement while still working a bit (as I transition away from full-time work), I/we are very likely to keep ~ 1-years’ worth of living expenses in cash.
This cash will be kept in various accounts (TFSA, RRSP) but some of it will be in a high-interest savings account for liquidity as well as within my corporation.
Bucket 2 Dividend Paying Stocks
I like getting paid to be a shareholder.
So, I/we intend to “live off dividends” once we’re debt free while working part-time in semi-retirement.
Bucket 3 Equity ETFs
Sure, income from stocks is nice but growth is important (and essential) too.
Total returns always matter.
I know there is a bigger world out there beyond my basket of “TULF” stocks I focus on for Canadian investments:
- “T” for telecommunication companies (think BCE, T (Telus))
- “U” for utilities (think FTS, EMA)
- “L” for low-yielding dividend growth stocks with growth potential (think CNR, CP, WCN, and others)
- “F” for financials (you know the names and ticker symbols: RY, BMO, BNS and others).
Beyond these types of stocks, I own low-cost ETFs for extra diversification and growth from around the world.
Overlooked retirement income and planning considerations
In no particular order of importance, here are some important considerations.
1. Consider treating government benefits like CPP and OAS as fixed income
You’ll see in my bucket approach above there is really no mention of any Canada Pension Plan (CPP) income or Old Age Security (OAS) income. That’s because while we expect this income to fund some of our retirement needs it’s more of a safety net to cover higher spending needs throughout retirement.
Given both government benefits also include some inflation protection (CPI), I personally consider CPP and OAS very bond-like. For this reason, I have a tilt towards equities in our personal portfolio and likely always will. This tilt exposes me/us to more market volatility but it should also provide us with better (higher) returns over time than fixed income.
I believe the more you can tilt your portfolio to hold more equities during retirement, including those that pay dividends or distributions, the more retirement income you could potentially generate.
2. Consider treating workplace pensions as another form of fixed income
My wife and I are both very fortunate to have some workplace pensions to draw from in our future. My pension is a defined benefit (DB) pension plan. That means my benefits (income) is defined in my financial future based on my contributions now. My wife’s plan on the other hand is a defined contribution (DC) pension plan. That means her contributions are defined today but her total portfolio value at the time of retirement is at the mercy of market success using certain investment funds.
If you have a DB pension, then consider taking on more investment risk for more potential reward in your portfolio to increase retirement income; using stocks or low-cost equity Exchange Traded Funds (ETFs).
3. Consider the psychological shifts with asset decumulation
Up to now, you’ve been busy saving and investing in your asset accumulation years.
You and I have been told the following:
“SAVE FOR RETIREMENT!”, “PLAN AHEAD, YOUR FUTURE SELF WILL THANK YOU!”
That’s because retirement years are different.
In retirement there is likely no longer a mortgage to pay (at least this is our plan).
Depending on your lifestyle, entering retirement, if you have kids, they might have left the house by now. The costs of raising kids are over. In retirement you no longer have wardrobe expenses for work. You will no longer have commuting costs.
My point is: some expenses in retirement disappear.
I believe one easy mistake many folks planning for retirement make is reliance on any rules of thumb. Sure, the 4% rule isn’t perfect; it remains a good starting point but you shouldn’t follow it exclusively.
$1 million generating 4% will of course generate $40,000 in the first year, meaning a $50,000 withdrawal will reduce the account balance by just $10,000. Depending upon how your money is invested, and any future sequence of returns, $1 million may support $50,000 of annual withdrawals for 30 years or more.
In fact, using the 4% rule things could be so successful that 50% you will finish with almost X3 wealth on top of a lifetime of spending using the 4% rule.
The reality is, even a modest RRSP/RRIF portfolio of $500,000, saved up by age 65, that portfolio value inside an RRSP can generate some decent retirement income. Combine this income with other assets and any government benefits (CPP, OAS) and many investors at a traditional retirement age may have what they need…
To help you with your psychological shift associated with asset decumulation try and play with a few FREE retirement calculators such as my personal favourites here.
4. Consider tax efficiency as important but not everything
Unlike your current working years or years leading into retirement, taxes may not be a much; taxed at the source like they are with employment income. By planning the accounts that should be drawn down first, investors can alter and potentially optimize the amount of tax they must pay. Investors can absolutely smooth out taxes over time and ensure they are not incurring a huge tax bite in their later years – when dependable retirement income might be vitally important for elder-age health reasons.
Mind you, financial decisions shouldn’t be made on tax implications alone.
For what it’s worth, even though we’re not semi-retired yet, we believe the following withdrawal strategy could work for us and might work for you as well.
My retirement income and planning draw down order
“NRT” = Non-Registered (N) then RRSPs (R) then TFSAs (T).
What does that mean?
N – Regarding non-registered accounts
- Again, we intend to work part-time in our 50s and “live off dividends” to some degree.
R – Regarding RRSPs/RRIFs
- In our 50s and 60s, we’re going to do something unconventional – we’ll start withdrawing assets, slowly, from our RRSPs. This will help smooth out taxes over a period of decades.
T – Regarding TFSAs
- We don’t intend to touch our TFSA assets in any early retirement, instead, we will let our TFSA assets compound over time.
- By our early 70s, with part-time work done, with taxable assets likely sold and most of our RRSP/RRIF assets gone, our plan is to live off income from mainly any government benefits (CPP and OAS) and TFSA income/withdrawals. The latter will be tax-free!
A reminder these are some of the key reasons for taking your CPP and OAS as late as possible:
- you don’t necessarily need the money to live on now (consider exhausting RRSP assets before age 65 or 70);
- you have good reason to believe that you have a longer-than-average life expectancy (we hope so!);
- you are concerned about market risk to your savings portfolio (yes, as we get older in our 50s, 60s and 70s, I don’t want to deal with finances as much since this shouldn’t be the time to worry about money);
- you aren’t concerned about leaving a large estate – so you use up some or all personal assets before taking government benefits (correct).
5. Consider death as part of life and planning for it is important
Sadly death will happen to all of us. This makes planning for it important for your spouse and family as part of estate planning.
Related to taxes, based on my readings, pre-retirees tend to overestimate the tax they will pay in retirement.
Someone earning $100,000 of salary will generally pay 25-30% average tax depending on their province or territory of residence, and 35-45% marginal tax on their next dollar of earnings. In retirement, someone with $50,000 of income would pay at most 15-20% average tax across the country, and depending on the sources of income, it could be close to zero!
Income like eligible pension income, capital gains, and Canadian dividends are eligible for tax credits or reduced income inclusion rates. Married couples can also split income more easily in retirement to minimize their combined family tax.
If you want to know how best to structure your accounts, to name beneficiaries for tax planning and estate purposes, check out this comprehensive post here:
When it comes to life insurance, I wrote about a number of life insurance products in plain language here. I believe retirees need to consider liquidity requirements for the spouse or family to pay off all debts and/or replace any income that would stop upon death.
Retirees also need to identify their Powers of Attorney (PoAs) and executors, including what’s going to happen if they’re incapacitated. Retirees should strongly consider keeping a list of financial information that is current; documenting bank accounts and investment accounts and pension accounts in an easy-to-find location for their family members.
Overlooked retirement income and planning considerations summary
If you haven’t already gleaned this from my article I hope you’ve noticed a few things above:
- We’re far from being fully retired yet but we feel the importance of planning for it. This makes the process of any retirement income planning far more important than the real outcomes that might occur years from now.
- We’re looking at our retirement plan as a holistic exercise that includes elements like taxation impacts and estate planning. Retirement is more than just generating retirement income.
We’re thinking about these things because we believe it’s the right stuff to think about before we execute on our plan. Ultimately you need to determine what’s best for you personally and financially. I hope these overlooked retirement income and planning considerations have helped you out.
Stay tuned to more blogposts on retirement income and planning as my thinking matures.
What’s your income plan for retirement? Do you have one? Are you already there and accomplishing your needs and wants?
There are also dozens of Retirement stories and essays you can learn from here.
Instead of focusing on the 4% rule, you can drawdown your portfolio via Variable Percentage Withdrawal (VPW).
Want some personalized help, well beyond what any free tools could ever offer?
Tired of searching for a financial plan and paying too much money? Have you Googled a financial question but can’t get an answer to your specific financial situation? Have you tried all the “free” financial calculators online, but just can’t seem to get the answers that you are looking for?
Have you looked into a financial advisor to run some numbers and/or projections for you but you are not willing to pay thousands of dollars?
I get it.
I don’t blame you.
I wouldn’t pay that money either. 🙂
Instead, my partner and I at Cashflows & Portfolios offer TWO low-cost retirement projections solutions to support your retirement readiness and planning ideas – to any DIY investors supported by DIY investors.