The conversation with clients about retirement income planning is very different today than it has been in years past. The complexities of managing income from employment pensions, Retirement Savings Plans (RSPs), Tax Free Savings Accounts (TFSAs), Locked In Retirement Accounts (LIRAs), non-registered investment accounts, CPP, OAS, etc. make retirement income planning a tax planning puzzle. Add to this the complexities of the investment portfolios and it is a challenge, indeed!
A recent IMCA (Investment Management Consultants Association – now known as the Investments & Wealth Institute) International Conference held in Toronto in September looked at the issue of investment planning and management during retirement years.
It was recognized that retirees have an understandable desire to protect capital from market corrections and other risks and therefore have a bias towards being much more "conservative" than when they were building wealth. This tendency to lower risk could result in lowering potential returns over time. Lower returns could then possibly conflict directly with the income objective needed to achieve one's lifestyle goals.
There is also the risk of outliving one's money. Speaker Moshe Milevsky noted that there are currently 7,500 Canadians over the age of 100 and 80% of them are female. There are 280,000 Canadians over the age of 90 with 75% of them female. A retired couple, both age 65, have a 50% chance that one of them will live past age 90*. Ironically, therefore, avoiding risk in one's retirement portfolio could create the very risk (outliving your money) that a retiree is trying to avoid.
So, what is the appropriate assumption for rates of return in retirement? A meaningful approach is to plan a withdrawal rate (rather than a return rate), as this will capture both investment returns and inflation. Some planners point to 4% as a safe withdrawal rate while others point to 3 or 3.5% because of today's low interest rates and the expectation of muted equity returns in the coming years.
There is no "magic number" when identifying how much capital will be needed in retirement, as everyone‘s situation is unique. Everyone has their own individual lifestyle, hopes, dreams, resources, etc. There are strategies, however, that can be implemented to plan one's retirement income, taking into consideration all of the goals and the risks associated with this phase in one's investing life.
Call us today for a review of your current or expected retirement income planning strategy!
*Investments & Wealth Institute, Focus on Investing for Decumulation. Retrieved on November 16, 2017.
