In my last reflection on 25 years of financial insights, I offered some guidelines for those who are approaching retirement and wondering how to proceed. Today, let’s take a closer look at one aspect of your retirement adventure: How do you create a sound strategy for drawing income in retirement?
Playing to Win
Let’s start with your obvious (but easier said than done) greatest goal:
Your winning investment strategy is the one that strikes the best balance between enjoying your money while ensuring you never outlive it.
To use a sports analogy, strategizing a winning retirement is like preparing for the rest of a game in which you’re already comfortably ahead. You may shift your game plans from all-out offense toward stepped-up defense, but you’ve still got lots of plays left to make; you’ll want to make them right! As such, the overall game plan is to strike a fair balance between protecting your head start while positioning yourself for continued success.
Forming a Game Plan for Success
As I covered in my last piece, your retirement logistics should be guided by a solid financial plan. Once you’ve created your plan, establish a schedule for reviewing and updating it as warranted … at least annually, and whenever your life’s circumstances change. In addition:
SWP it – Set up a monthly income flow from your investments, using a Systematic Withdrawal Plan (SWP). Review your spending annually and adjust as needed. Unless you’re swimming in money, it’s usually best to start conservatively, and loosen up as time and dollars permit.
Lumpy thinking – If you’ve got lump sums arriving in your future, carefully plan for them in advance. You may want to earmark some of the payout as “fun money,” but also plan for how to prudently allocate most of it, or you may accidentally blow more of it than you intended.
Expect the unexpected – Maintain at least three months’ worth of readily available emergency funds.
Smooth the tax bumps – If possible, try to flatten your taxes in retirement by generating relatively consistent taxable income from one year to the next. Big picture, this should help you reduce your marginal tax rate as well as reduce your total tax bill in retirement.
Running Defense With Your Accounts
By the time you’re ready to retire, you and your spouse may well have myriad accounts, accumulated throughout your working years. How do you best manage them?
Consolidate it – You can simplify and optimize your cash-flow planning by consolidating as many of your far-flung accounts as possible under the management of a single advisor.
Private pension – We typically suggest putting your private pensions into play as soon as possible. If your spouse does not have a private pension and a spousal survivor benefit is available, shoot to score at least 60% for that. Also, check to see if you or your spouse qualify for any foreign pensions.
RRIF it – In retirement, it often makes sense to convert your Registered Retirement Savings Plan (RRSP) accounts into Registered Retirement Income Fund (RRIF) accounts. As the name suggests, RRIFs are structured for generating tax-effective income streams. That said, if you have less flexible locked-in accounts (such as locked-in RRSPs or LIRAs), I typically suggest depleting them first.
Open accounts – Unless your tax planning is subject to unusual circumstances, try to draw from your open (taxable) accounts with an eye toward triggering the smallest capital gains.
Save your TFSAs for last – From a tax-planning perspective, I typically advise investors to leave their Tax-Free Savings Accounts (TFSAs) as their income source of last resort. I also recommend you keep funding your TFSAs if you’re able, even in retirement. They provide an excellent backup resource if needed, while providing a continued tax-free investment opportunity if you don’t.
Hands off your leverage and spousal loan accounts – Steer clear of drawing from your leverage or spousal loan accounts, lest you taint the tax benefits you’re seeking by opening them to begin with.
Running Offense on Your Investments
Throughout your investment lifecycle, a few timeless principles still apply. Here are a few:
Global diversification for life – Maintain a low-cost, globally diversified investment portfolio, balanced between and among stocks and bonds and reflecting your goals and risk tolerances.
Regularly revisit your risk profile – Every three or four years, revisit your ability, willingness and need to take on higher risks in pursuit of higher expected returns; adjust your portfolio accordingly. That said, it’s rare that you’ll want to abandon equity investing entirely. Ample academic evidence plus 25+ years of my own observations are clear: Even in retirement, a measure of return-generating stocks (versus volatility-dampening bonds) usually remains advisable.
Avoid stock picking and market timing – Trying to pick individual stocks or time when to enter and exit the market is expected to add extra costs, without contributing to expected returns. Don’t do it.
Last but not least …
Create a plan upfront, revisit it regularly, and stick to it over time as your life preserver in uncertain markets. But, again, don’t forget to appreciate your money along the way. Especially in retirement, when you do spend, spend it on that which will bring you the most joy. That’s what it’s there for.
