An investing road map for retirees

Project and adjust your expenses

As you enter retirement, it's valuable to compare your in-retirement budget with your ledger when you were working. If you were a heavy saver while in accumulation mode, taking savings off the table means that you're apt to need a much smaller sum than you did while you were working. For this reason, Morningstar's David Blanchett has found that higher-income workers' income-replacement rates in retirement are much lower than their lower-income counterparts'. Of course, your spending may rise in other categories, such as travel and healthcare, but it may be offset through lower expenditures on categories such as work transport and eating lunches out.

A budget is as valuable in retirement as it is while you're working and saving, but it requires some discipline and a bit of artfulness: Aim to strike the right balance between minding expenses and counting every penny. In addition to employing a budget on an ongoing basis, look forward and anticipate major lumpy outlays in retirement, such as when you expect to need a new car and years in which you expect that your travel budget will run high. Such forecasting will help you determine if your portfolio's withdrawal rate, discussed below, is realistic. This video from our recent Retirement Readiness Bootcamp examines the topic of spending in retirement.

Take stock of and maximize your guaranteed sources of lifetime income

The next step when plotting your in-retirement financial plan is to assess your guaranteed sources of lifetime income. For most retirees, The Canada/Quebec Pension Plan and Old Age Security will be their key source of guaranteed lifetime income; a small (and shrinking) share of the population will be able to rely on pensions that can be annuitized during retirement. (This article looks at the various sources of retirement income available to Canadians.)

Obviously, the greater the certain sources of lifetime income that you'll bring into retirement, the less you'll need to tap your investment portfolio (and the better its odds of lasting). Ideally, those certain sources of income will cover your baseline living expenses -- housing, food, utilities and healthcare/insurance costs. That underscores the virtue of maximizing those income sources.

Delaying the age at which you begin collecting government benefits, while not the right answer in every situation, is well worth considering, especially if your family and personal health history points to longevity. For every year that you're able to delay past your full retirement age, you can pick up a roughly 6% increase in your benefits -- an advantage that will be with you for the rest of your life. This article looks at the pros and cons of delaying the start of your government pension.

Decide whether -- and how much -- to annuitize

Basic income annuities are another way to add a baseline of guaranteed lifetime income to your in-retirement plan; retirement researchers love them for this reason. With a very basic annuity, you hand over a portion of your assets to an insurance company; in return, the insurer pays you a stream of income throughout your lifetime. There's the side benefit that an annuity can take the guesswork out of at least that portion of a retiree's income needs; that's particularly valuable when you consider that cognitive decline and financial fraud are growing threats in the elderly population.

Yet as straightforward and transparent as basic income annuities are, the decision about whether to steer a portion of your investment assets into such a product is complex. There's also the question about whether to purchase an immediate annuity -- from which payouts would commence right after purchase -- or a deferred annuity that starts paying out at some later date.

Retirees with pensions supplying a healthy share of their income needs have much less reason to consider annuitizing a portion of their portfolios than investors without pensions. Ditto for retirees who expect that their life spans will be average or below average; they'll tend to benefit less from the longevity-risk pooling that comes along with annuities. Investors should also bear in mind that annuity payouts remain quite low today relative to historic norms, thanks to the still-low yield environment. (If an insurer can only earn a meager sum on your money, it's not going to promise a very high payout to you.) One way to combat that problem is to purchase several annuities over a several-year period; that has the benefit of diversifying your purchases over varying interest-rate scenarios, and also enables you to diversify your risk across insurers. This article looks at a few pointers when purchasing annuities.

Don't rule out some type of work

The complexion of "retirement" is changing before our very eyes. Thanks to improvements in healthcare, many retirees are healthier and more active than their forebears. Moreover, many "retirees" aren't fully retired at all, but instead continue to work in some fashion into retirement. In fact, some of the biggest employment gains in Canada in recent years have been among people age 55 and over. According to Statistics Canada, there are now 3.7 million Canadian workers over the age of 55, an increase of 67% over the past decade.

Working longer can be a win-win-win from a financial standpoint, reducing portfolio withdrawals and improving portfolio longevity, allowing for other financially beneficial decisions like delayed government benefits, and even enabling additional retirement-plan contributions later in life. Yet even as working longer is a worthwhile aspiration, the data show a disconnect between the percentage of pre-retirees who say they plan to continue working in some fashion through retirement and the percentage who actually do so. While a third of the workers in a 2015 Sun Life Financial survey expect to be working full-time past age 66, only 12% of current retirees say they retired after age 66. Health issues -- for the older worker, spouse or parents -- and/or untenable physical demands of the job can derail a goal to work longer, for example. Thus, it's crucial to ensure that "working longer" isn't central to the viability of your financial plan.

Lay a safety net

Protecting your financial plan through insurance and emergency funding is every bit as crucial -- if not more so -- during retirement than it is when you're working. True, you can't purchase disability insurance if you're not employed; life insurance isn't typically a must-have for retirees, either. But you'll still need the basic property and casualty policies during retirement, of course.

And while you don't hear much about it, holding an emergency fund is also important during retirement. While you'll no longer need to worry about setting cash aside to tide you through unexpected job loss (and therefore your emergency fund can shrink), you'll still want to set aside a cash cushion to cover unanticipated outlays like big dental or vet bills, or home and auto repairs.

Stay flexible on the withdrawal rate front

Your withdrawal rate -- the amount you spend from your portfolio each year -- is a crucial determinant of your retirement plan's success or failure. But how to determine how much to take out without prematurely running out of money while simultaneously ensuring a decent standard of living in retirement?

Most financial planners agree that the 4% guideline is a reasonable starting point. The 4% guideline assumes that you withdraw 4% of your balance in year 1 of retirement, then inflation-adjust that dollar amount as the years go by. For example, a $1 million portfolio would support a $40,000 initial withdrawal; assuming 3% inflation, the retiree could take a $41,200 withdrawal in year 2, and so on.

But the 4% guideline rests on some important suppositions--first, that your portfolio has a 60% equity/40% bond allocation, and second, that you have a time horizon in retirement of 30 years. If your situation looks much different -- for example, you have a lighter weighting in stocks or a longer time horizon -- you'd want to be more conservative. The flipside is also true--retirees with shorter time horizons and/or more stock-heavy asset allocations should be able to spend a bit more than 4% initially. This article takes a closer look at the 4% guideline and how individual-specific variables might affect it.

Planners also generally agree on the virtue of staying flexible on your withdrawal rate, to the extent that you can. That means reining in your spending if you encounter a market shock that depresses your portfolio's value (especially if you encounter that market shock early on in retirement), while potentially taking out more in years when your portfolio is riding high. This article discusses some different methods for adjusting your withdrawal rate based on market conditions.

Pay attention to tax matters

Retirement planning would be so simple if we each came into retirement with a single investment account like a TFSA. TFSA withdrawals are tax-free, and there are no required minimum withdrawals, either.

Yet thanks to our tax laws, the reality will be far messier for most of us: We might have assets in TFSAs, but other assets in traditional tax-deferred and taxable accounts as well. In fact, the typical retiree today will come into retirement with most of her assets in tax-deferred accounts like RRSPs and employer-sponsored pension plans. Withdrawals from these accounts are taxable and are also subject to required minimums once you turn age 71 and convert them to a RRIF or LRIF; those withdrawals have the potential to bump you into a higher tax bracket.

One key concept when you begin drawing down from your portfolio is to first tap the accounts that are the least beneficial from a tax standpoint, while saving the accounts with the biggest tax benefits until later in your distribution queue. The standard withdrawal sequencing calls for RRIF minimum withdrawals, to the extent that you're subject to them, to go first in the distribution queue, followed by taxable accounts, and then other tax-deferred accounts. TFSAs, because they carry the biggest tax benefits, should go last. This article takes a closer look at withdrawal sequencing. As you may have gathered, withdrawal sequencing is an area where a tax advisor can add a lot of value.

Right-size your portfolio's risk profile

For many retirees, the decision about how to position their investment assets across stocks, bonds and cash seems hopelessly black-boxy, but it doesn't have to be. Rather, use your anticipated spending needs from your portfolio to determine how much to invest in each asset class. This is the basic premise behind the "bucket" approach to retirement portfolio allocation.

Under the bucket strategy, portfolio spending for years 1 and 2 of retirement (above and beyond what you're getting from government benefits, pensions and the like) should go into cash; it won't earn much, but nor will it run the risk of declining in value. Money for the intermediate years of retirement, say, years 3 through 10, can go primarily into high-quality bonds, which have higher return potential than cash without the possibility of dramatic downward swings that accompany stocks. Cash needs for the later years of retirement can go into stocks and other higher-risk/higher-return asset classes like low-quality bonds.

Give due attention to your estate and portfolio succession plan

Most retirees are well aware of the virtues of having at least a basic estate plan: powers of attorney for healthcare and financial issues, a will and a living will. A qualified estate-planning attorney can help you draft these documents and think through your options. Also give due attention to your beneficiary designations on your various financial accounts, as these will supersede any bequests you've laid out in your will.

In addition to estate planning, it's also crucial to give thought to succession planning for your portfolio. How would things run if you were unable to run them? Simplifying the moving parts in your portfolio -- switching away from individual stocks and employing more broad-market index mutual funds, for example -- is a worthwhile step, especially for older retirees. So is maintaining a master directory , a basic document that outlines your various financial accounts. Finally, consider bringing some financial help on board, whether it's a paid advisor or a trusted adult child, to provide the basic outlines of your plan and to use as a sounding board for any major changes you're considering. If for some reason you're unable to manage your own assets at a later date, that person will know the outlines of your plan and could step in and manage for you. This article takes a closer look at succession planning for retirement.

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