How To Generate Retirement Income
We spend years and years planning and saving for retirement. Yet, when it’s time to start spending our nest egg, it’s not always clear how to move forward. That said, perhaps it’s best to break this complex item down into a few simple steps:
1) Have a retirement plan in place
2) Keep your portfolio invested
3) Rebalance the portfolio as needed (in conjunction with cash flow needs)
The third step obviously requires more detail and specifics in order to determine where to generate the cash flow from. Individual investor portfolios will vary greatly of course, but let’s assume a balanced portfolio of both fixed income products and equities. There are a few points to bear in mind, in addition to the income that would already be generated from the fixed income portion, and on top of any other employer and/or government pensions that wouldn’t provide enough retirement income.
Firstly, consider taxation and try to tap into funds outside of registered retirement plans, such as TFSA & non-registered and/or corporate accounts. Within non-registered and corporate accounts where dividends, income and capital gains are taxed differently, compare the tax consequence in advance of selling individual investments such as stocks, bonds, mutual funds or ETF’s.
Beyond that, when one withdraws funds from registered plans such as RIF’s and/or LIF’s (required from age 72 onward) overall income needs to be taken into account, it can potentially affect government benefits such as OAS (Old Age Security), as well as income splitting opportunities with a spouse.
The idea of maintaining your principal investment and withdrawing merely the amount of return it generates is another strategy to consider, but it may or may not be feasible given individual cash flow requirements and portfolio size.
In closing, many people seem to make the critical oversight in retirement income planning of limiting their strategy to merely withdrawing interest and dividends, and disregard other strategies such as capturing portfolio growth as a form of income. Each individual retirement planning situation is unique and therefore all angles should be considered, especially as needs and income requirements may vary from year to year.