Create A Retirement Income Plan
When you walk out of your place of employment for the last time it can feel kind of scary financially. You’ll no longer be receiving the income you’re accustomed to. There’s also the fear of not having enough savings to last the rest of your life.
Where will your retirement income come from? Will you have enough to sustain your desired lifestyle, and will it last the rest of your life? Will there be enough left over for your beneficiaries to inherit or to donate to your favourite charity?
You’ve probably already decided on a retirement date, the lifestyle you want to pursue, where you want to live, and how much money you will need to live comfortably and, hopefully, you’ve paid off all your debts.
Related: Why Baby Boomers Aren’t Prepared For Retirement
According to a survey of household spending, middle class couples spend $40,000 – $70,000 a year with the average being about $54,000.
This seems to be on the high side for me, but I’m considered notoriously cheap – er, frugal – and I tend to be an under buyer, so the median of $39,000 would probably be right for me. However, every person is unique and each person’s financial situation and cash needs are different.
Now, instead of receiving income from only one source – your employer – you will now have to manage multiple streams of income.
Where will this income come from?
Fixed income sources
I call these fixed income sources because, even though there may be adjustments for inflation, you know how much you will receive monthly, and the income is paid to you for life. These sources include:
- CPP/QPP – check Service Canada for the amount you’ll receive
- Company pension(s) – check your benefits statements
- Pensions (government or otherwise) from other countries if you were employed overseas
Income dependent government programs (again, check with Service Canada):
- OAS
- GIS and Allowance (for low income seniors)
The closer you are to retirement, the more accurate the figures will be.
What about annuities? These will provide a cash flow for life in exchange for a lump sum.
Current low interest rates and optional features such as guaranteed fixed terms and joint or last survivor options will reduce your monthly payment. Because of the way they are structured, I probably wouldn’t consider an annuity until I was around 80 years old.
If this option appeals to you, make sure your agent runs through several scenarios to be better able to make a good choice.
Turn your savings into retirement income
To supplement your monthly cash flow you need to look at your own resources. You can structure your investments to provide a steady income stream. Depending on your own comfort zone you could invest in some combination of:
- Bonds – Government or Corporate (pay semi-annually)
- Dividend paying stocks (pay quarterly)
- Preferred shares (usually pay quarterly)
- Monthly income funds in mutual funds or ETFs
- Income trusts such as REITs and Utility trusts
While I wouldn’t advise buying an investment based solely on payout times, you could buy products so you receive a similar amount of income each month. Just remember to diversify.
If you own mutual funds you could set up a systematic withdrawal plan which will provide you with a specific payout amount, usually monthly, but can be any predetermined interval.
Related: Beat Inflation With Rising Dividends
TD Waterhouse offers an “Income Generation Account” or “Sweep Account” where interest and dividend income is automatically transferred from your non-registered account then transferred to a bank account of your choice twice a month. This may be of interest to some.
The 4% rule states that if you retire at age 65 you can theoretically withdraw 4% a year from your nest egg and it will last up to 30 years.
This assumes that you are invested in a balanced stock and bond portfolio.
Because we’re looking at a long span of time though, we can’t be certain of the effects of market volatility, actual returns or inflation.
Personally, I like to focus on receiving income. A portfolio of $100,000 invested in a well-designed portfolio of dividend paying stocks and income trusts could easily give you $400 or more a month without even touching your capital.
If you own your own home – mortgage-free – you can tap into your home equity with an equity secured line of credit or reverse mortgage but these are not for everyone. Many seniors finance the costs of moving to a retirement home from the proceeds of the sale of their residence.
Related: Should You Sell The Family Home?
Effects of taxation
The generally accepted principle of RRSPs is to contribute to the plan to reduce your marginal tax rate in your greater earning years, and then withdraw in retirement when your income will be much lower.
The advice is to use up your non-registered investments first and let your RRSPs grow on a tax deferred basis until you must start withdrawals at age 72.
This plan will not work for everyone. It’s conceivable that someone who receives a large company pension, CPP and OAS could easily exceed his or her previous employment income. Add to that the required minimum withdrawal of a large RRSP/RRIF account and they would be paying more tax than ever.
Related: Using Tax Free Savings Accounts In Retirement
In a case like this, to minimize taxes, it might be preferable to start withdrawing RRSP amounts earlier to reduce the balance and take pension amounts later.
When estimating your tax rate consider the following:
- Your RRSP withdrawal is considered income and will impact clawbacks of GIS, OAS and the age tax credit.
- Dividend income from non-registered accounts is grossed up which increases your net income for OAS purposes.
- Low-income seniors who collect GIS may have their benefit cut approximately 50 cents for every $1 received from an RRSP.
- By having dividend paying stocks in your TFSA you will lose the dividend tax credit, but withdrawal of the dividends will not be taxed.
Final thoughts
It might be difficult to find a financial advisor who will assess all your income sources to provide a sustainable, tax-efficient income. After all, most advisors make their living from contributions and/or the size of your portfolio.
Related: Fee Only Financial Planner Vs. Commission Based Advisor
Take some thought to create a written plan that will work for you. Couples can pool their resources. Budget carefully and be flexible.
To paraphrase Mr. Spock – “May you all live long and prosper!”
Planned retirement date: 2043 at age 55 or 56.
No hope of seeing a dime from OAS or GIS (thankfully), even if they still exist. I’m crossing my fingers that CPP and my pension are still there after paying in for decades, but 30 years is a long time for our government to go the way of Greece.
Going to amass money and, sometime in the next 30 years when rates hit a ridiculous late 70s/early 80s rate of 20%+, lock into a deferred annuity to pensionize that nest egg come retirement. Not an optimistic view, but I’d rather be cautious.
Quick Question,
When income is mentioned is the number to be understood as gross or net?
@Kurt: I understand income to mean before taxes.
Retirement can be a scary undertaking. I’m still a long ways off but I plan on creating income streams from multiple sources such as company pension, retirement savings in 401k(I’m from U.S.), investments in dividend growth stocks and some rental income from rental properties. I think the more sources of income you have coming in the more safe you will be through retirement. For me though I have to start early enough to get these sources created and large enough to provide the needed income.
@Dividend Growth Stock: Best to learn the lesson from us procrastinating boomers and start investing in your twenties (or sooner). I’ve had dividend paying stocks for years and by continuously reinvesting the dividends my nest egg has grown better than if I had just made contributions alone.
I agree with you in that I’d rather have income from different sources than just rely on my capital to make withdrawals from – a number that’s way too high for me to reach now.
I like the idea of multiple income streams. For me Social Security, pension, brokerage accounts and IRAs. Additionally some side (blog) income. It helps that I generated a nice nest egg years ago from rental property and businesses.
Like krantcents, I too love the idea of multiple income streams.
I hope we can earn about $60,000 income in retirement. That should be plenty with a paid off home. Hopefully $30 K of that will come from dividend income starting at age 55. A man has to have a dream 🙂
Just a note: there are quite a few Canadian (and American) stocks that pay distributions or dividends monthly, not just quarterly. Examples I can think of quickly include the linen company KBL, some REITs like HR.UN, and some telecomms like SJR.B.
I think some of these companies like the idea of long-term investors who are after income, not necessarily capital gains, so they encourage them by paying out monthly.
Anyway, I enjoyed the article. It reminded me to continue trying to develop a portfolio that will provide a smoother income stream in the future.
@Bet Crooks: You’re right that a lot of companies – and most income trusts – pay out monthly. As I mentioned, I wouldn’t purchase an investment based solely on their payment schedule, but it would not be difficult to structure your portfolio for regular monthly income.
Retirement can be a little scary, just like what you have mentioned. The retirement savings that you have may not be enough to last a lifetime. It’s a great idea to turn your retirement savings into income. However, you should carefully decide what type of investment you would want to venture in.
DO YOU THINK THE MANULIFE PENSION FUND BUILDER IS GOOD.
I JUST INVESTED 25,000 DOLLARS AND IT LOOKS LIKE I WILL GET 325 APPROX A MONTH ONCE I START WITHDRAWING.\
I HOPE I DID NOT MAKE A MISTAKE IN PURCHASING THIS PENSION FUND BUILDER PLAN.
I think you want to be careful about the popular 4% rule. Michael James did a good piece on how that rule does NOT take any portfolio expenses into account. Jim Otar has also done some really good work showing that asset allocation has little if any bearing on the sustainability of a retirement/distribution portfolio. In both cases, the result is a lower sustainable withdrawal rate. 3% may be a safer guide.