Ah, retirement! Finally, we can live exactly the way we want to. In my case, that’s learning to cook international cuisines, dancing with Javier Bardem on a beach in Bali, and relaxing in a Muskoka chair surrounded by our beautiful, multicultural grandchildren.
I encourage my clients to dream of their ideal retirement as well as planning for what is inevitably an unsettling experience— going from a steady pay-cheque to drawing upon savings to cover expenses. Few people have reliable and inflation-adjusted employer pensions any more. Fewer still, have sufficient investment portfolios to produce enough income to live on. The reality is we’re all concerned about outliving our money and this can— and often does—prevent us from fulfilling our retirement dreams.
One of the most important things I do for UPotential clients is prepare the “maximum sustainable budget”. The “maximum sustainable” budget determines the highest standard of living that you can enjoy to age 90 without tapping into your home equity. If your home equity is intact at age 90, to cover the costs of health-and long-term care or for your estate, you’re unlikely to exhaust your resources.
By comparing your maximum sustainable budget to your current and anticipated lifestyle, you’ll know how reasonable it is for you to enrol in “Le Cordon Blue”— or if there’s some more work to do.
You’d be surprised to learn that even having a large bank balance is no match for “bag lady syndrome” – the fear that we’ll outlive our savings and end up homeless. What a shame for this fear to keep us from fulfilling our personal goals. I recommend that clients create some mechanism of regular deposits into their bank account that resembles that steady, reassuring paycheque. Consider it a “DIY pension”.
Here’s how to implement your own“personal pension plan”:
A monthly “sweep” (or a systematic withdrawal plan).
Many financial institutions can “sweep” interest and dividends that accrue in your investment account and deposit these into your regular chequing account. When combined with Canada Pension Plan (CPP), Old Age Security (OAS) and Registered Retirement Income Fund (RRIF) deposits, this “sweep” can provide you with an additional source of regular income. Payments may not be the same every month because different investments pay out income on different schedules, but it’s still a reliable deposit. If you’re accumulating too much in your chequing account, you can pause the “sweep”.
Monthly withdrawals from a cash account.
Another way of simulating a regular pension payment is to have accessible cash in your investment account to supply a pre-set monthly transfer to your bank account. Cash can be in the form of money market funds, or a series of GICs that mature in 6-month increments to fund your cash flow needs for the foreseeable future. You could also redeem a pre-set amount from a mutual fund. It’s better not to fund your monthly needs by selling stock or bond positions since these incur commissions. However, if your portfolio is largely comprised of stocks or bonds, you can trim positions periodically and reinvest the proceeds in money market funds from which the transfers can be withdrawn.
Purchase an annuity.
An annuity is a contract. In exchange for making a lump sum deposit, you receive regular payments for life. The amount you get depends on various factors such as the size of the deposit; whether the funds came from a taxable or non-taxable account; health condition; need for inflation-protection; continuing payments to a surviving spouse; and current interest rates. Our generation-long, low-interest rate environment has made annuities unpopular, but they still serve a purpose which is to provide reliable, predictable payments for life.
Despite the fact that we work and save and dream about this transition to retirement, the actual change can be unsettling. Working with a financial planner can help you to understand the upper limits of your affordable lifestyle and how to mechanize your savings to make those retirement dreams come true. Javier, here I come!
