The retirement planning conundrum never seems to change. It just gets more complicated. Ensuring sufficient income for retirement is now on the radar for every so-called Gen-Xer, and increasingly for Millennials as well. In short, if you’re in your 30s or 40s, it’s time to get serious about retirement saving. If you think “middle age” only starts at 50, think again. As a wise man once pointed out, “I’ll consider middle age to be 50 when I’m guaranteed to live to 100.”
The fact is, however, that Canadians are living longer. As average life spans lengthen to over 80, there’s the distinct possibility of running out of money in retirement. A significant decline in health, sudden critical illness, and a need for quality long-term care are risks we all face as we age.
Unfortunately, government pension plans are becoming increasingly stressed. The average monthly payment for Canada Pension Plan and Old Age Security is less than $1,200 per month. With governments under pressure to curb runaway spending, there’s very little appetite in the workforce to increase public pensions to those who have retired.
In addition, the private pension landscape is changing too. Defined benefit pension plans are going the way of the dodo. Defined contribution plans, which let individuals choose contribution levels and pension management options, are becoming more popular.
And with ever-present inflation and investment risk, building an adequate nest egg has become more of a challenge than ever.
What you’ll really need
A rule of thumb is that in order to maintain your lifestyle during retirement, you will need 60% to 70% of the average annual income for the last five years of your employment before your retirement.
According to research, only about 39% of income replacement at retirement comes from government pensions and plans, such as the Canada Pension Plan and Old Age Security. The remainder must be made up from private employer pensions and personal funds.
Building your retirement income stream
At retirement, creating a stream of stable, reliable income becomes a paramount consideration. After all, you’ve spent perhaps 30 years carefully building a considerable nest-egg that needs to provide a steady income for possibly another 30 years.
To begin with, look at proven income-producing products and potential income streams to create the best cash flow for your retirement needs and to comfortably meet contingencies as you age into retirement.
You’ll also have to plan for tax efficiency to keep the tax take to a minimum and prevent clawbacks of government plans. Consider a combination of sources to produce the most tax-efficient income-portfolio possible, one that’s built for income security, asset growth, and inflation-protection.
Here are the top income-producing assets that are likely to form part of your retirement income portfolio, categorized by tax rate payable:
Top-tax assets: bonds; interest income; pensions; employment earnings; registered annuities; GICs; RRSP/RRIF; real estate rental income.
Mid-tax assets: mutual fund distributions; insurance policy cash value; corporate class mutual funds; prescribed annuities; stock dividends.
Low-tax assets: home; personal capital; Tax-Free Savings Account withdrawals; leveraged insurance policy cash value.
The challenge is to turn this stew into a safe, reliable, tax-efficient, long-term income stream that lasts as long as you do. Most of us are too busy with our own lives to become expert portfolio managers and financial planners as well. If you’re in a higher net worth bracket and have already accumulated a sizeable portfolio on your own, it makes sense to hand off some of the money management responsibility to a professional financial planner and money manager, who can objectively assess your financial situation, your needs, objectives, and risk tolerance. The object is to create a sustainable plan that will nail down your financial security in old age.
Courtesy Fundata Canada Inc. © 2016. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice. Securities mentioned are not guaranteed and carry risk of loss. No promise of performance is made or implied.