Generate a retirement income

Retirement income planning is a process, not a one-time event. To manage it effectively, you need a strategy or game plan that can adapt to changing market conditions as well as to personal needs, goals and objectives– any of which may change dramatically over time.

Determine Income Needed to Maintain Standard of Living

This step involves taking your financial objectives and putting numbers beside them. 

First, take an inventory of your primary expenses – the things you absolutely need to spend money on. Then, create a list of those secondary expenses (or objectives) that aren’t essential but would enhance your happiness, such as travel, hobbies and gifting.

Develop an Investment Policy Statement (IPS) that captures your unique goals and objectives along with your risk tolerance. Typically, this is a detailed 2-page document that sets out exactly how your account should be managed given your personal constraints.

Have a tailor-made and detailed retirement income illustration created. This illustration should be based upon the results of the IPS information, along with a detailed analysis of your situation. This will allow you to estimate how much income you can generate from your investment assets and pension entitlements, like CPP and OAS, and your company pension plans.  This retirement income illustration should be able to report an after-tax and after-inflation income (net spendable income) for the rest of your expected lifetime. 

When estimating your life expectancy, add at least 5 or 10 years to your number. This is because life expectancy is a median number, that is, half the people of every given age die before this date and half the people die after this date.  This personalized retirement illustration should be rerun every 2 years as assumptions will change and your lifestyle wishes may also vary over time. If you redo this illustration every few years, then you should never go too far off your planned course.

Finally, design a tailor-made investment strategy that will allow you to generate an income through your retirement years.  In generating an income during retirement, it is important to not withdraw funds from an asset class that is declining in value.  If you are unlucky enough to retire when the stock market is performing poorly (and you need to generate income from your portfolio), then you could deplete your capital at an alarming rate - and reduce the chances that your portfolio will be able to generate your required net spendable income throughout your remaining retirement years.

Prepare Retirement Income Projection

There are many variables and assumptions that go into a financial projection, such as rates of return, portfolio contribution amounts, inflation, tax rates, income needs at retirement, life expectancy and sources of other income (pensions, etc.).

We use projection software that will factor in all of the above variables (and many more) to provide a complete picture as to how feasible your retirement income plan actually is.  Understand, however, that financial projections can be quite different from your financial reality at retirement. The further you are from retirement, the more sensitive you must be to the various assumptions used in financial projections. Even a slight variation in assumptions can have a dramatic impact on your retirement picture.

Income Integration

In retirement, you will have a combination of different income sources that need to be integrated. You will probably be entitled to some type of government benefit (OAS, CPP), you may have a company pension plan and you may have your own investment assets (RRSPs, real estate, savings accounts).  It is important that you use these income sources in the most effective manner to generate your desired net spendable (after-tax, after-inflation) income in your retirement years.

"In large measure because of my advisor, within two years, I was able to reach my goal of early retirement , confident that, with her advice, my assets would continue to work for me in a more effective way than i could have ever imagined."

Nancy G.