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.
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):
- 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.
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.
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.
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!”