Twenty-Five Years of Financial Insights (Part 12: Drawing Income From Your Portfolio)

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As we approach the finish line on our 2016-2017 series of articles inspired by 25 years of financial insights, I am reminded of another milestone in most people’s lives: The year they decide to retire. At that pivotal time, your daily routine isn’t the only thing that undergoes a major change. After a lifetime of investing toward retirement, it’s now time to start withdrawing for it. Even if you’re well-funded for the event, that’s a mighty big shift, in mind and matter alike.

Before, you spent decades focusing on portfolio management details such as how much risk and expected return you wanted to pursue over time, and how best to manage market risks through global diversification. These remain important considerations in retirement as well. But new questions begin to clamor for your attention. Questions like:

  1. Should I start my Canada Pension Plan (CPP) at age 60 or wait? (Ditto for my spouse.)
  2. When’s the best time to convert my Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF)?
  3. How should we manage our spending – for household expenses and big-ticket items alike?
  4. What should we do to minimize taxes and safeguard ourselves against inflation, market downturns or other unexpected events?

Fortunately, while the financial landscape and the questions it generates may at first seem unfamiliar in retirement, you can navigate much of the new terrain using many of the same financial planning strategies that apply throughout your life.

The most important among those familiar features is sustaining your well-developed financial plan. Or creating one, if you’ve not yet done so (advisedly, with a professional planner to assist). Here is my list of “debits” and “credits” to consider before you touch your first dollar of retirement income.

Retirement “Debits”

  • How much will you budget for routine expenses – food, clothing, shelter, etc.?
  • How much will you budget for travel and leisure?
  • What other big-ticket items are expected – cars, home renovations, philanthropy, gifting, etc.?
  • Do you have family dependents or other commitments to fund?
  • What will your taxes be?

Retirement “Credits”

  • Will your tax rates decrease as you age?
  • What types of financial accounts do you have at your disposal?
    One of my biggest recommendations to most clients is to fund as many varied accounts as possible for added flexibility in retirement, and to build up a nonregistered portfolio at least a decade or more out from retirement (earlier if possible). This gives you the ability to withdraw tax-free or tax-minimized lump sums or monthly income in retirement.
  • What pensions do you have? Are they indexed to inflation? Do they allow flexibility, such as starting early or delaying withdrawals?
  • Will you or your spouse work part-time for supplemental income, and how might that affect the rest of your retirement planning?
  • Do you plan to downsize your home and, if so, when? How much money will that likely free up for other purposes? (As I covered here, it’s important to be realistic on that!)

Retirement Realities

There’s one last consideration I advise families to factor into their financial planning for retirement: Based on your family history and your own health, what is your approximate life expectancy?

You usually want to financially plan for what ironically qualifies as a “worst-case scenario” of living beyond your expected time here on earth. You also want to be mindful that, if there are two of you, you’ve got an even greater chance at least one of you will beat the proverbial odds. That said, as I covered in “Beatrice’s Lesson 9,” life isn’t about living like a pauper if your circumstances don’t demand it. To all things, balance.

Before I wrap, I’d like to circle back to the possibilities afforded you by having a number of funded accounts to choose from as you swing into retirement. These might include your RRSP or RRIF, open accounts, Tax-Free Savings Accounts (TFSAs), pensions, CPP, and Old Age Security (OAS).

What comes first, how much and how often? Before I “retire” my series of 25-year reflections, I’ll be covering that too.

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