Weekend Reading – Navigating the Retirement Risk Zone

Weekend Reading – Navigating the Retirement Risk Zone

Hey Folks!

Welcome to some new Weekend Reading about an important subject: navigating the retirement risk zone.

This is another important subject to understand if you are considering semi-retirement like I am or full-retirement at any age.

I’ll link to a few past posts and related considerations as part of this edition soon, first, a reminder: it’s “RRSP season”:

RRSP facts you must remember this year and beyond!

Weekend Reading – Navigating the Retirement Risk Zone

Readers, DIY investing advocates on this site, and equally importantly, prospective members to these low-cost retirement income services often wonder the following when it comes to retirement planning:

• What can I spend from my portfolio?
• How long could that money last?
• What accounts should I draw down first (to make my money last)?

I’ve asked those questions myself about our own portfolio – and I continue to do so!

Ultimately, there is no perfect answer since all inputs are subject to change: your account values, inflation, rates of return, taxation and variable spending just to name a few. This is why I’ve always said and firmly believe that retirement income planning is a process – one that has a beginning but it never really ends.

If your needs in semi-retirement or retirement are anything like mine, you want to accomplish a blend of the following:

1. meet desired spending and fun,
2. navigate and minimize taxation,
3. fight some longevity risk. 

In running my own math over the years my retirement income projections tell me a valuable story. While my retirement income budget has been established for a year or so now, something I will update later this year, it also tells me my own narrative about navigating the retirement risk zone. 

Financial Independence Budget

What is the Retirement Risk Zone?

Simply put: the stakes are higher for you and me.

Years ago, I could afford a significant market loss and weather inflationary pressures since investing time was on my side when the market tanked and I could simply plow more money into the stock market – which I did. The same is not necessarily true in the years ahead. This is why I’ve been planning for a few years now – preparing for the 5-year period before semi-retirement begins and then positioning my portfolio for some downside protection after I start semi-retirement; for at least another 5-year period.

Image Source/Attribution to:

How to Navigate the Retirement Risk Zone?

While there are many tactics beyond this post, I think think some key ones to consider are the following:

1. While it may be tempting to tap CPP and OAS income sources early in retirement – delaying each could be better. By optimizing your recurring, inflation-protected, pension-like retirement income streams like CPP and OAS at start dates of age 65 and beyond – you could be rewarded with hundreds of extra dollars per month!
2. If you have an RRSP (R), non-registered account (N), and TFSA (T) entering semi-retirement or retirement, you might want to consider an RNT or NRT drawdown order. Related to RRSPs/RRIFs and LIRAs/LIFs, tapping these registered accounts sooner than later could not only help you with your retirement income needs in your 50s and 60s, you can also “smooth out taxation” from the tax-deferred assets inside this account. You can read about a free case study from Ashley and Tim to see this in practice below.
3. You should consider how dependable your income streams are in semi-retirement or retirement if the stock market falls by 10%, 20% or more. (I’ll link to how long stock markets stay down later on in this post.) You might want to consider a cash wedge like Ashley and Tim have also done – they can ride out at least 1-year or so of really bad stock market returns without touching their RRSP portfolio at all.

Case Study:

How much do you need to retire on $6,000 per month?

The financial challenges to the Retirement Risk Zone are these key ones I’ve learned:

1. Market Risk – the years leading up to retirement are not the time for 100% high-risk investments. A stock market correction in this zone can really hurt your portfolio value. This is tied to some Sequence of Returns Risk. Beyond being all stocks all the time, this is why I also tend to ignore recent market returns when I do my own calculations/projections. Recent, higher portfolio returns of 20%+ for me including 2024 are not common. Instead, you may want to run some income planning reports that focus on more conservative returns along with modest to higher near-term inflation. (I use 5% returns and 3% inflation for my own income planning needs.)

2. Inflation Risk – ignore inflation at your peril. It’s one of the many wealth killers along with taxation and financial fees as shared by Larry Bates.

Beat The Bank like Larry Bates

To help fight inflation over time, at least consider a bias to owning more stocks than bonds and within that, some equities that fight inflation too.

3. Longevity Risk – failing to see retirement income planning as an ongoing process, two things could happen: 1. you could run out of money too soon (which would be terrible of course) but 2. you could also leave lots of money on the table thanks to a lifetime of market anxiety and subsequently chronic underspending.

Summary: How to Navigate the Retirement Risk Zone

The most successful DIY retirees I know take all these key factors into retirement income planning consideration: market forces/drastic changes, inflationary pressures and potential longevity risk. This assessment work tends to occur long before retirement begins and long after retirement has started. 

If you want to work through What-If scenarios in a low-cost way, I can help you whenever you wish including a discount just for being a My Own Advisor reader.

If you are working through your own spreadsheets and tools, all good too. 

Aligned to my theme for this week, I see retirement as a continuous transition; the temperature and risks simply get turned up a few notches the closer you are to your retirement date and after. I look forward to sharing more details about how I embark on this transition during 2025.

More news to come in the coming months. Thanks for reading.  

More Weekend Reading – Beyond Navigating the Retirement Risk Zone

Part of my inspiration for this week’s theme was from this post: $1 million is still a lot of money for any retirement.

Is $1 Million Still a Lot of Money?

From the author Nick Maggiulli:

“Whether we are looking at changes in prices or overall wealth, $1 million isn’t what it used to be. Today, you’d need anywhere from $2 million to $4 million to have the same buying power as millionaires around the turn of the century. But, focusing too much on the raw numbers misses a bigger point.

Because if I had to choose whether to be a millionaire in 1998 or today, I’d take today every time. The issue isn’t purchasing power, but the absolute level of goods and services that you can get today vs. 30 years ago. Though you could buy a better house back then with $1 million, just about everything else is better today.

We have better technology. We have better healthcare. We have better entertainment options. We have better shipping and logistics. And so forth. The device you are reading this blog post on is multiple orders of magnitude more advanced than anything that was available in the late 1990s.

When viewed from this perspective, $1 million goes further today than ever before.”

A Wealth of Common Sense blogger Ben Carlson wrote about the perfect level of wealth. From Ben:

“Unfortunately, many people never reach true contentment, no matter how much money they have.”

How long do stock market corrections last? It could be a year or more.

How long do stock market corrections last?

Finally, a reader asked me to link to this Globe and Mail article (subscription) that included some tax-timing tips:

• Check your brokerage or financial institution starting now for relevant tax slips; consider online delivery of these documents.
• A reminder of these key dates:
  • Monday, Feb. 24: The Canada Revenue Agency’s Netfile service opens, which means tax returns can be filed online.
  • Friday, Feb. 28: The final day for employers to issue T4s and T4As.
  • Monday, March 3: The deadline to contribute to a registered retirement savings plan for the 2024 tax year.
  • Wednesday, April 30: The tax filing deadline for most people. If you don’t meet the deadline, you could start incurring penalties if you owe money to CRA.
  • Monday, June 16: The deadline for self-employed people to file their taxes. Any balance owing is due April 30.

Have a great weekend!

Mark