How to Plan Your Retirement Income

By Brendan Donahue & Sara Worley

Investment Advisors, Manulife Wealth Inc.

        Many people wonder about their income in retirement. How much should they withdraw from their RRSP? What types of investments should they own? How can they avoid running out of money? Here are some tips on how to structure an investment portfolio and generate retirement income from savings.

Buy Equities

        Many people think that when they retire, they should get out of the stock market and buy bonds instead. The idea is that portfolio risk should be dramatically reduced when a person switches from saving to spending their investments. 

        This strategy is often acceptable during times of normalized interest rates. Today, with Government of Canada 5-year bonds yielding just 1.37 per cent, bonds might not provide enough to last through one’s retirement years.

        Equities don’t have to be risky. In fact, many large-cap Canadian and U.S. stocks carry a medium-risk rating. Depending on one’s risk tolerance and income needs, a few carefully chosen stocks, mutual funds or preferred shares in conjunction with low-risk investments like bonds and GICs would likely provide adequate returns in retirement. 

        Those who buy equities should always have at least 2 years of cash set aside in their retirement accounts to cover living expenses. That way, they won’t have to liquidate stocks during times when the markets are soft. 

Try the 4% rule

        The 4 per cent rule is designed to help a person’s savings last for 30 years. The basic premise is if a person spends 4 per cent of their nest egg in the first year of retirement and adjusts that amount for inflation thereafter, their money would last at least 30 years.

        Like most rules, of course, there are exceptions. Firstly, the math is tied to long-term average returns which, since 1926, have been 10 per cent annually for stocks and 5.3 per cent for bonds. Nowadays, the 4 per cent rule is still effective, but would require some component of equities. Those who don’t want to use equities could instead take a lower amount, say 3 per cent annually, and invest in a diversified portfolio of bonds including domestic and foreign government, and corporate bonds.

Reassess annually

        Regardless of whether a person uses the 4 per cent rule or another method, retirement income should be reassessed annually. This is to ensure the amount is still adequate and to consider any effects of the markets. For example, if the stock markets had a very good year it might be wise to shift some profits from equities into lower risk investments. If the markets did very poorly, drawing from one’s fixed income investments is likely a good idea until the stock markets can rebound. 

Annuitize

        When interest rates are normal or higher than average, guaranteed-pay investments like annuities might be a good idea. In exchange for a lump sum, an annuity will guarantee a monthly income stream for a specific period of time, or life. 

        Another option is to buy a Guaranteed Minimum Withdrawal Benefit (GMWB) investment. These programs offer a guaranteed monthly income stream while allowing one’s money to participate in stock market returns. The program can usually be cashed out of at any time for the market value of the underlying assets. 

Final thoughts

        While it’s true that too much risk in an investment portfolio can be devastating, having too little risk can be just as harmful. This is because being overly cautious could cause people to run out of money prematurely.

        Moving from a mentality of saving money to one of spending it can be tough for many new retirees. It’s also common to worry about spending too much money early on, but rest assured, statistics show that people tend to spend less as they age.   

        If you have questions about retirement income planning, be sure to discuss them with your financial advisor.