I’m not near “retirement age” yet but I think about it often. I suppose for individuals in their 50s and 60s, they are forced to think about retirement and how to fund it more often than they care to admit. No doubt recent stock market volatility has forced many people to question if they can retire at all, if so by when and how much might be enough.
Most personal finance and investment books I’ve read focus on asset accumulation tactics: saving for retirement, what investments you should own, what accounts you should use over other accounts but few investing books get into how those same investments should be optimized or changed for retirement. This is an underappreciated body of knowledge that should be written about more in my opinion; asset accumulation doesn’t mean a thing unless you have an asset preservation strategy to go along with it.
Today’s post will share a couple of retirement perspectives I have as we march towards retirement.
Perspective # 1 – Creating a dependable income stream from personal savings
I’ve shared on my site before what I think we might spend in retirement. These are certainly assumptions at this point since we have no idea what the future has in store for us. I have a high-level of confidence though we will not need the same level of income (adjusted for inflation) in our retirement years when compared to our working years now. I anticipate the mortgage will be gone as will all consumer debt at the time of retirement. From this perspective, we should not require the same income stream in retirement as we do today since we are not servicing large amounts of debt. (About 40% of our net income today goes to servicing debt this includes base mortgage payments, lump sum mortgage payments and a small car loan that will last two more years).
To replace our full-time salaried income in retirement we’ll need some reliable income streams. We anticipate those income streams will come from the following personal savings sources:
- Dividend income from stocks, and
- Distribution income from Exchange Traded Funds (ETFs).
Our goal, although it’s admittedly a stretch goal, is to eventually have about $30,000 in dividends and distributions paid to us each year from our investments to cover some living expenses. Pension income will be another source of retirement income outside of our personal savings. I’m assuming the capital from our mix of dividends and distributions will generate an income of about 4% per year, every year, so I’ll leave you with the math to figure out what our personal savings “enough” number might be.
Perspective # 2 – Creating a variable income stream from part-time work
With the mortgage and all consumer debt gone at the time of retirement, I’m anticipating no debt will open up a world of possibilities for us. One of the possibilities we will explore once we’re debt-free is a transition from two (2) full-time jobs to part-time jobs. Sure, if one of us or both of us loves the work we do, there is no reason to change and I suspect we’ll continue working full-time. On the other hand there are no guarantees with job market.
At minimum, we’ll need full-time jobs until we kill our debt and as we build our assets for dividend and distribution income, part-time jobs won’t do the trick. The need to work after our debt is retired will largely depend upon 1) what our expenses will be and 2) what income can be generated from our investments at that time. Until our debt is gone our financial plan is really rather simple: keep working hard, keep saving and stay invested as much as possible.
If you’re working towards retirement, what comes to mind? If you’re already in retirement or transitioning to retirement, what comes to mind?
Knowing what one will spend in retirement is a tough call. My plan was to spend more in retirement than I spent while working — and the first two years I did. I spend weeks in the summer traveling about in my vintage English roadster and enjoying every minute. In the second year, while motoring about California with my wife, I had a heart event that put me in the hospital. I was forced to sell my Morgan, a car I had kept for 45 years, and I had to put all travel outside the country on hold as it was now impossible to get travel insurance. And now, my wife and I find we are taking care of two grandchildren a lot of the time. Not an expense we envisioned. We saved money when our travel plans got curtailed but on the other hand we faced an unforeseen financial drain with the kids, and I could go on. My advice, plan generously. If you are lucky, and you really do retire, meaning no more work, you may spend a lot more enjoying those first years in retirement than you think you will. Plan generously so that you are not blindsided.
Sorry to hear about selling your car, I guess all things change, eventually…so this is a good lesson in that Rockinon.
Life happens, re: travel plans got curtailed…an unforeseen financial drain with the kids. These things happen and you certainly can’t predict them. I like your advice, plan generously. This way if I am able to keep my health, etc., then I can afford most of the things I want to do. Thanks for the insightful comment.
I couldn’t imagine being in debt in retirement. I am also not one to think about retirement in either of these terms. Sure, I save for the future, but I can’t imagine working in a mediocre job my entire life so that I might be able to enjoy my life when I’m 55 or 65. So I work really hard, save up big chunks of money, invest some for the future and then take months off here and there to enjoy my time while I still can!
I like the balance and we try and do the same thing. Life is for the living. I can’t imagine working a shi…(crappy) job for 30+ years only to find the time to do some things in life after age 65. It’s really almost “too-late” to start living it up then; you’d miss out on so much….
As a retiree living off dividends and a pension I agree that most of the Canadian blogs I follow are biased toward the accumulation phase of investing life. (Probably because old farts like me are too technologically challenged to write our own blogs – which I have considered just to get a forum for discussing the topic)
Investing in retirement is easier in that there is no “the number” to worry about, what you have is all you can deal with. However creating a stable, tax efficient and sufficient income from your saving has a lot more moving parts involved than the buildup ever required. I was amazed at just how different the two phases, building capital and creating income, turned out to be in real life.
If anyone knows of a site that focuses on this subject please leave a post.
Great observation Richard. There is research in this area but it’s geared more towards advisors than retirees. A few suggestions for your review;
1) Nerds Eye View Blog (written by an advisor, a bit technical)
2) Retire Happy Blog by Jim Yih
3) LinkedIn Group called Canadian Retirement Mentoring Group shares some worthwhile articles
4) Moshe Milevsky, Prof. at York University, has written papers on drawing down retirement funds
Hope these help.
Thank you Patricia. Prof M. is a great resource for the overall structure of your retirement finances. I am hoping for more ongoing ideas just like My Own Advisor or The Dividend Guy provide.
Will consider drawdown strategies as future topics for my own blog. Thanks for the idea!
Excellent sources Patricia. My fav. is Moshe, a very bright guy!
I don’t know of any sites that focus on income from investments, for retirement purposes, but you can bet my site will include these articles more in the years go come Richard.
This is what I’m thinking as well…the stable, tax efficient and sufficient income flow is not easy to figure out, but my plan is coming together for that. To me the key is having multiple income streams as to provide financial flexibility.
I am also rapidly approaching retirement in the very near future. In fact, every day brings me closer to it. LOL As most people.
At any rate there are many variables depending on the money you have available – RRSP, TFSA, OAS, Company pension, GIS, taxable interest/dividend bearing accounts, etc. The way and when you draw money from them can make a difference in the long term viability of your funds. I am almost wondering if I will be able to qualify for the GIS by drawing down my taxable accounts without touching the RRSP till I am 71. Some people find this detestable to “take advantage” of the system to the supposed detriment of the government coffers but the government had no qualms about dipping in to the EI surplus for their own balancing act instead of lowering the premiums we pay for the EI. That is a whole other topic from what we have here.
At any rate the major thing is to try to quantify just how much you need to live and how much you need to enjoy life which is over and above three meals a day and a roof over your head – car, travelling, gifts, hobbies, etc If you can’t quantify that then you have little chance of figuring out how much you need to “live” and how long it will last.
We are all concerned that we will not have enough money to do the things we want to do once we have retired but that all depends on what we want to do. I know a couple who live very comfortably on CPP and OAS. They have no other monies but are quite happy with their lives. So our own perception of happiness in retirement can be our un-doing, especially at the start of retiremnt, if we are gung-ho to spend, spend, spend while we can.
Do you need two cars or do you want two cars? If you are two people then two cars may be a “necessity” for good relations. I am on my own and would like a Corvette. Do I need it? No. Would I like it? Definitly. Can I afford it? Ouch! It will not cost more for gas as I can only drive one vehicle at a time but there are two license plates, two insurances and a Corvette’s tires are bloody expensive. Plus depreciation on two vehicles over their lifetime, even if you only drive one at a time. So it is up to me to judge my means versus my desires and make a call on it.
So this all brings us back to the beginning. Many variables to take in to account. What do you “need”, what do you “want”, how much do you “have”
Good stuff and sounds like a good solid plan. I haven’t posted for a while but thought I’d give an update on my situation so some of the younger people can see that the dividend income plan can work. There always seems to be a bunch of negative press about this type of approach.
A little background first. I like to think that I’m an average guy who had an average salary while working. My wife was a stay at home mother so we just had the one salary. We have simple tastes and a simple lifestyle. We get most of our enjoyment from family (we have both kids, spouses, and 3 grand-daughters in town) and from the outdoors.
I’m now 61 and a half and have been retired for a year and a half. I’m a DIY investor who doesn’t have any company pension. We have no debts at all. I collect CPP and the rest of our income comes from our dividend income. Just before retirement, I started transitioning our investments from a total return approach to a strictly dividend income/growth approach. I’m now done the shift. We own 3 mutual funds (one of which is a high yield bond fund), 25 stocks, and 1 ETF. We have no regular bonds or GICs. We always stay fully invested.
At the start of 2013, our annual dividend income was 62.5k. It’s now >96k after all the juggling. It is way more than we need so we are actually still accumulating. The extra cash just gets invested in more dividend income stocks which of course generate more income. We also own a number of companies who regularly increase their distributions (18 of the 25 had an increase in 2014).
Anyway, bottom line is that dividend income investing can work in retirement.
Take are and best of luck with your plans.
Great to hear from you Don.
It’s comments like these that cement my approach, a blend of ‘core’ and ‘explore’. We have almost 40 stocks from the U.S. and Canada in our portfolios and I have no intention of selling them, unless of course they turn into a TransAlta 🙂
Interesting you don’t have any regular bonds or GICs; but I suppose with that income, well, you’re doing very well!
Like you, I hope to reinvest all dividend income from stocks and distributions from our ETFs to generate more income for retirement over the next 10-15 years. I’m convinced this game plan will work and it seems to be working for you in retirement, just fine. Thanks for sharing the update and stay tuned for my update next week.
Another perspective for funding your retirement depends on your estate planning goals. What I mean is that if you do not plan to leave anything behind for your children or a charity, you can drawdown the capital of your investments, instead of having to rely solely on their dividends and distributions. You’d be able to meet your retirement goals with significantly lower assets with this ‘capital depletion’ method. On the other hand, if you want to leave the capital behind for your beneficiaries, you would have to go with the ‘capital retention’ method and only draw on the dividends and distributions for your retirement, in which case you’ll need the entire $1M+ that you are aiming for.
The capital depletion vs retention argument is often used in life insurance as well with my clients when determining the amount of life insurance they need to support their families in the event of their deaths.
Fair points Brian. I guess we’re aiming for raising capital now, so we can spend the income derived from the investments in retirement, then draw-down the capital for living expenses if we get to old age. This way, we can die poor on our own terms.
Our intention is not to leave very much capital behind, some will definitely be donated to our favourite causes and those in need. Our plan is to self-insure as much as possible after age 50, another 10 years or so. Thanks for the detailed comment.
Great post Mark as you always give me something to think about when it comes to investing and the future. You are very inspiring with your goals and I wish I had the push to start investing on my own but I’m still hesitant I’ll mess up. Maybe I need more motivation.
Now that the mortgage is gone as you know our focus is on our investments. I’m hoping to stay on top of our investments so we have something set aside for our retirement years which is still over 25 years away if we retire at 65. Now that we have a baby we also have to consider him as well. I agree with Phil that it’s hard to come up with a magic number because we are all different. I don’t think we will need as much money as we think we do however who knows what will be when we reach that time.
Thanks Mr. CBB. I recall you have a paid off home, therefore, little to no debt, so you’ve done very well to accomplish that in your 30s. I’ve taken a different approach whereby I’ve saved and invested, and decided to kill debt a bit more slowly. There is no perfect answer and nobody’s answer will be the same as yours. If you intend to work until age 65, full-time, there is lots of time to save and invest now that you’re mortgage free. It will require discipline though but I’m very confident you have it.
We also invested as well as paid down the house. I think it helped that my wife and I both bought houses when we were very young and sold them to make a good profit when we got married. This gave us a decent start but with budgeting helped us pay it off faster. Along the way we always participated in our retirement funds but now we are investing even more. I agree there is no perfect answer and every ending will always be different because no one can predict the future.
A decent start indeed! I think you guys are doing amazing. You’re going to be financially free in another 10 years or so if you continue to keep this pace!
I agree with Gary on this one, if everything goes as you are planning and even if it doesn’t you have the knowledge and will have the flexibility once you are debt free to tweak the plan. Remember retirement plans tend to need flexibility, and that is where knowledge helps out. Many of us who use planning, tend to bias towards a worse case, and averages being what they are, mean most of us will manage just fine. It is hard to compare numbers and calculate that “right”, “magic” retirement number or formula because we are all different. Know yourself, and your families patterns and adapt accordingly. I think what most miss in preparing for retirement is knowing what they are actually living on now, and how can you plan with no personal historic data? You need to know your situation. Having $1M, $4M, $500k, who knows if you can make it… someone could, but could you? That is the real questions that need to be asked, and well prior to not working… – Cheers.
It is crazy to think about all the permutation and combinations when it comes to planning for our financial future, but at least we have a start Phil – so thanks for your detailed comment. This is where you point rang true to me: “It is hard to compare numbers and calculate that “right”, “magic” retirement number or formula because we are all different. Know yourself, and your families patterns and adapt accordingly.”
Well said. I look forward to posting your article related to this subject, you have lots of insight to offer folks.
if everything goes as you have planned you will have an amazing retirement mark. with your investments, company pensions, oas, cpp and no debts you should be on easy street. i wish you both good health and a long life which of course go hand in hand.
Thanks Gary. I figure you don’t have much in life if you don’t have your health. I’m realizing this more and more. I hope to become more fit in 2015, this is a major personal goal of mine.
Your analysis is comprehensive and very thoughtful. So are your comments regarding wealth drawdown vs. accumulation. Wish everyone gave the same level of thought to their retirement and personal finances! Building your TFSA as high as possible will give you the best flexibility in retirement to manage your after tax income (which is what really counts)! Good luck!
Thanks Patricia, I always like hearing from readers. Our goal is to max out our TFSAs every year, for as long as possible. It’s not easy but we’re working on it!
The only danger of assuming you can get part-time work is also one of the other major factors and that is your health and ability to do work. I would not rely on having that income as part of any plan, but if I can get some extra income, that would be put in the “rainy day vacation” fund.
Agreed Alan, those are wildcards, the desire to work can be there but the ability is not guaranteed, although the same can be said today. The risks associated with your human capital increase with age if you must work.
I still have yet to dabble into funds, but for now dividend income seems to be the route i’ll be taking when the idea of retirement starts to enter the picture.
$30,000 is a very reasonable income for someone who is debt free and someone who owns their home, or someone who has managed to find a fair priced rental unit.
You don’t plan on using the income generated form this website to help fund your retirement income?
“You don’t plan on using the income generated form this website to help fund your retirement income?”
I wish it paid well 🙂
There are no sure things but hopefully the investments will do well. Time will tell! Thanks for your comment Ace.
HMMM! That 4% rues it’s head yet again. Seeing you hope to obtain approx $30K in dividends that just about puts your non-registered and TFSA portfolio at approx $800K (4% of $800K is $32K of dividends). If you question why I said non-registered funds it is simply because it is the government who has/will decide the mandatory withdrawal rate from your RRIF, assuming you have an RRSP(s). Remember though that dividends are taxable all be it at a lower rate.
Not bad for non-registered and TFSA savings. Depends on how old you are right now and your projected retirement age.
Reading your article on projected money needs of approx $54K net in todays dollars and then approx $73K net in 2030 that probably puts you around $100 – $110 gross before taxes in 2030. If you are going to pull all this from non-registered accounts and your TFSA at a 4% draw down you might as well aim to have $2 million in your accounts. Don’t know where you are at now but you seem to have at least 25 years to achieve that.
Of course once the CPP and OAS kick in your draw down can diminish and if you have a company pension and RRSP’s then you just might be quite well off.
I know of one couple who live quite comfortably on their QPP & OAS. That is all they have. And they are quite happy with their life.
Thanks for the detailed comment. I figure we need $1 M in invested asset + debt-free + pensions to retire comfortably. If we can have most assets such as dividends taxed at a lower-rate, this is ideal of course.
Our projected “retirement” expenses will be about $73K net in 2030. We definitely can’t fund this from non-registered accounts. We’ll need to rely on RRSP withdrawals, pension income or part-time work to make up the difference. Once CPP and OAS kick in we shouldn’t need to draw down any RRSPs, likely because they will be gone and all money converted to non-registered or tax-free income.
I know working on my own terms will make me happy and this is what my wife and I are striving for.
Sounds a lot like we aimed for.
Certainly debt free and we have been for some years.
From just two years experience, I would think that your expenses estimate is high, we really are spending next to nothing. There again wanderlust has not kicked in yet.
As for working part time in retirement, forget it. You have no spare time!
I like the sounds of NOT working in retirement since I will have no spare time…. 🙂
Ideally for myself I would like to save enough to retire comfortably but continue working part time. I would like to not have to rely on the income from working, but still work since I really enjoy the work. I think retirement would be best done slowly over a transition period and working part time for a while would allow me to do that. Plus there are so many other ways to earn part time income and I can’t imagine not taking advantage of some of them
We sound very similar Dan, save enough to work part-time when that day comes. A good plan and one to aspire to.