Overlooked retirement income and planning considerations
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 approaches to earn income in retirement.
Thankfully there are a few great resources available to aspiring retirees and those in retirement – some of those resources I’ve written about before.
Reviews and articles on my site:
An article about creating a cash wedge as you open up the investment taps.
There is also this great resource about Variable Percentage Withdrawal (VPW) – something I intend to write more about in the future.
Getting older but my planning approach stays the same
As I get older, I’m gravitating more and more this aforementioned “bucket approach” for retirement income purposes. This 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).
The table above highlights with modest retirement expenses, we should be able to live off a portfolio of approximately $1 million once we’re debt free – largely “living off dividends”.
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.
Beyond saving and investing towards your “retirement number”, and assuming some CPP and OAS benefits will flow their way to you, I thought I would also list some other (overlooked) retirement income and planning considerations in no specific order.
- Treat government benefits as fixed income
Again, you’ll see in my income above there is 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.
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) longer term returns 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.
- Workplace pensions can be 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 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 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. We have not included our pension in the above table.
Although these pensions are for the most part secure the income from them has yet to be fully determined. Anything can happen in our financial future so we save and invest on our own to supplement any pension risks.
For the same reasons above, if you have a workplace pension you can rely on, certainly a defined benefit pension plan, I would consider this pension a “big bond”. I would 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).
- Manage the psychological shifts with asset decumulation
Up to now, you’ve been busy saving and investing in your asset accumulation years. You’ve been told to “SAVE FOR RETIREMENT!”, “PLAN AHEAD, YOUR FUTURE SELF WILL THANK YOU!”, and more.
Asset decumulation years will be totally different. In retirement there is likely no longer a mortgage to pay (at least this is our plan to have no debt whatsoever at the time of retirement or semi-retirement).
In retirement, if you have kids, they might be working now and on their own. That means helping them with their post-secondary education costs is no longer needed.
In retirement you no longer have wardrobe expenses for work, work lunches to pay for, commuting costs to work to worry about. You might have more money than you think!
I suspect for many Canadians when people go from saving aggressively using their RRSP to converting some or all of these assets into a Registered Retirement Income Fund (RRIF), there’s a major psychological shift that occurs. This is because retirees feel the need to maintain the value of the assets they’ve worked so hard to build. This psychological shift might be difficult for some retirees to overcome.
The reality is, even a modest RRSP/RRIF portfolio of $400,000, saved up by age 65 can generate some decent retirement income. Combine this income with other assets, like part-time work; a workplace pension(s); government benefits in the form of CPP and/or OAS; selling real estate assets such as their primary residence and simply rent in retirement – investors’ may not need to worry about not having enough – depending upon their income needs to cover expenses of course.
To help you with your psychological shift – play with a few retirement calculators such as my personal favourites here. You could start withdrawing $25,000 per year from your RRIF at age 65, and more over time to combat inflation, and have little risk of running out of money before age 90.
- Tax efficiency is important but not everything
Unlike your current working years or years leading into retirement, taxes will often not be withheld 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 health reasons.
While financial decisions shouldn’t be made on tax implications alone I believe they should be an important part of the retirement income equation.
For what it’s worth, even though we’re in our 40s, we believe the following withdrawal strategy will help optimize the taxes we might pay during retirement:
- In our 50s and 60s, start withdrawing assets from RRSP when not working or working part-time to cover retirement or semi-retirement expenses. This will start reducing the deferred tax liability that is our RRSPs before any workplace pensions kick in.
- In our 60s, exhaust all RRSP and/or RRIF assets.
- In our mid-60s, consider taking CPP and/or OAS government benefits. There is the real potential for us to delay our CPP and/or OAS until age 70.
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).
Regarding non-registered accounts
- In our 50s and 60s, spend income from this/these accounts to cover retirement or semi-retirement expenses.
- After our all RRSP and/or RRIF assets are gone, wind down the tax liability that is our non-registered investments.
- By our early 70s, exhaust all non-registered assets – leaving workplace pensions, government benefits, and our TFSAs “until the end”.
- In our 50s and 60s, exhaust all other accounts except TFSAs.
- By our early 70s, our plan is to live off income from our workplace pensions, government benefits and TFSA income. If we continue to maximize contributions to this account like we have been doing, every year since inception, it’s not unrealistic that in 30 years our TFSAs will be earning tens of thousands of dollars per year; money that can be withdrawn tax-free. You can play with more excellent TFSA calculators here.
What I am trying to say is, with all of this, by planning the accounts from which retirement income with flow from you can exert some control over your income taxes to be paid.
- Like taxes, death is 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.
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. There should be a will in place and shame on you if you don’t have one in retirement already.
If you haven’t already gleaned this from my article I hope you’ve noticed a few things above:
- We’re far from being retired yet but we feel the importance of planning for it – together. This makes the process of 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 and something that needs ongoing improvement. Things change and not everything is adequately accounted for yet including our estate planning and end-of-life plans.
We’re thinking about these things because we believe it’s the right stuff to think about. Ultimately you need to determine what’s best for you personally and financially. I wish you well.
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?
Beyond income planning what are you doing about tax planning, estate planning, health-care planning and more? Drop me a comment and share your plans to help others as well.