Creating An Effective Retirement Income & Investment Plan

Retirement Income Planning, Calgary

What they wanted was advice on organizing their sources of retirement income - what they got was an investment plan!

The fact is most retirees want help with organizing their affairs as they approach retirement and help with understanding government benefits and when they should start taking them. They wanted to know the best time to start taking income from the various investment accounts they had. The reality is: The strategy that was used to grow their retirement portfolio is not the same strategy they need now to take income from that portfolio and to ensure they don't outlive their money. 

No one wants to outlive their money! 

The truth is most financial advisors can help you grow a retirement portfolio but few have the expertise to manage a retirement portfolio where the primary objectives become preserving capital and taking income.

Consider 4 significant risks when it comes to your retirement.

1. Inflation - once you determine your retirement budget for basic living expenses and fun money you then have to ensure that you factor in that the cost of these items will incrementally increase over the next 10 - 30 years. All your sources of income and your portfolio have to be growing to factor in a 2-3% rate of inflation.

2. Volatility - Income from a portfolio generally falls into 2 categories. First, is fixed income products, such as bonds or GIC's. These investments generate interest income. The second category is equities. These are stocks that generate dividends and capital gains. Market volatility can cause great fluctuation in retirement income, especially if you're withdrawing capital. In addition, and more significantly, volatility can erode your money causing your portfolio to dwindle faster than expected. This is the #1 fear of retirees in Canada - running out of money.

3. Longevity - No one knows how long they need their money to last. As people are living longer, your money has to go the distance as well (25-35 years). Dying with too much can be bad as well. If you have too much money in registered accounts when you die, CRA will take a fair chunk of it or it may end up in the hands of undeserving recipients. 

4. Death of a spouse - This can have a significant impact on your cash flow because there is little survivor benefit from CPP and nothing from OAS. Other work pensions can be reduced as well, to 66%. 

Most of the clients that we work with retire at age 65 and have an average of $500,000 in cash investments spread among various savings accounts like their RRSPs, LIRAs, and TFSAs. They own their home with no mortgage ($400,000 average value) and are receiving CPP in the range of $700/month each and will qualify for the usual payment of $601/month of Old Age Pension which starts at age 65. (2019 numbers) This will give them $2600 a month in government benefits and they will have to get the rest of their retirement income from their $500,000 portfolio. If their total income need is $5000/month, that will mean they have to take $2400/month from their portfolio. That's an annual withdrawal of $28,800 or 5.8% of the portfolio. That may seem too high, but it can work. With an average annual rate of return of 5%, the money will last 17 years - with no adjustment for inflation. 

After 17 years the couple is now 83 years old and moving into the "no-go" years and the need for fun money is most likely decreasing, however, the need to fund health or long-term care needs may be increasing. This is when they can tap into the equity in their home by either selling and downsizing to a condo or a rental unit or using a reverse mortgage or home equity line of credit. If they had $400,000 of equity in their home 17 years ago then most likely that has grown over time to be closer to $560,000 (@ 2% annual growth). This money can provide them more than ample resources on a tax-free basis to carry them for the rest of their lives. The equity in their home is a tax-free benefit and will have no bearing on government benefits and entitlements. It's important to not outlive your money, but it's equally as important to not have too much left at death and lose 40% or more of it to taxes, probate and lagal fees. 

Not everyone fits into a simple plan like this. That's why a retirement income plan is crucial so that you structure your income properly and take income from the right sources and in the right order at the right time. 

Consider these additional alternatives:

The same couple could delay their CPP and OAS and draw down their investment portfolio first. Delaying their CPP and OAS to age 70 will mean that they will receive much more in their monthly pension and have a higher amount of guaranteed income for life. However, the risk is the untimely death of a spouse and all of a sudden the surviving spouse has much less cash flow to live on.

The couple could delay both their government pensions and their investments and downsize earlier in retirement and tap into more tax-free money in the early years to defer pensions and investment growth to the later years.

We work with many couples and single retirees and we seldom see 2 situations the same. How our clients have benefitted from working with us is by how we create a unique and comprehensive income plan designed for their specific situation which maximizes their income, minimizes the amount of unnecessary taxes they will pay and ensures they will have guaranteed income for life without the fear of running out.

We create specially designed portfolios that focus on generating guaranteed income first and growth second. Never running out of income is more important than never running out of money. Dividing the portfolio up into various buckets so that income can be strategically generated from each bucket depending on timing and need, rather than throwing everything into one bucket.

What buckets are used and how much is allocated to each bucket will vary from person to person, but generally will include some global equities, private equity, managed portfolios, guaranteed income from cashable annuities, and segregated funds. 

Conclusion

It's important in retirement to have a trusted advisor that you can work with for many years to come. 55% of pre-retirees will change advisors when they transition to retirement because they realize they need specialized planning with a focus on income protection.

If you are in or close to retirement and would like to meet with us to put together a retirement income plan, book time in our calendar for a meeting time. There's no charge for an initial consultation. Here are the questions you need answered:

  1. How long will my money last?

  2. How much can I spend each year and still have confidence that I won't run out of money?

  3. When should I take CPP and OAS? 

  4. Which of my assets should I spend first to create tax-efficient income?

  5. How much should I be saving now so that I can generate the income I'll want in retirement?

 

We can help you create sustianable, predictable cash flow from your portfolio in the most tax-efficient manner to ensure you never have to worry about running out of money.

Want to retire in the next few years? Click here to Book  an Introductory Meeting

To learn more about creating retirement income with cashable annuities attend our next seminar - Register Now!

 

Willis and Nancy Langford

Retirement Income & Investment Planners

587-755-0159

 


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