Optimizing your retirement income
If you are heading toward retirement with a well-balanced portfolio of assets and/or guaranteed income sources such as an employer pension, you may already have enough anticipated resources to create a life-long income stream. The key to making your plan as sustainable and tax-efficient as possible lies in understanding how you want to use your savings and how much you can afford to withdraw each year.
How you should use your retirement savings:
Assuming you have made provisions for your loved ones through your estate plan and for any causes you hold dear through charitable giving plans, managing your retirement funds comes down to how you want to use them. Here are some options to consider:
Plan to preserve all your money and live on the income only:
If you enter retirement with substantial savings and multiple income streams you may be able to live on the income generated by your investments and never have to access the capital. This option results in the opportunity to leave a healthy bequest to heirs, charities, and groups you support.
Plan to spend some of your retirement funds:
You may decide that you are comfortable living off the income from your investments while you draw some of the capital. In this case, you need to estimate how much you can withdraw taking into account limits that apply to Registered Retirement Income Fund (RRIF) withdrawals and your expected tax rate. You also need to ensure that any capital withdrawals are done in sustainable manner to ensure your funds last your lifetime and still meet your estate objectives
Plan to spend most of your retirement funds:
You may be comfortable depleting most of your retirement savings by a certain age. How long you need your money to last depends on your life expectancy (something you can’t estimate) and the percentage you withdraw each year. The chart below demonstrates the principle.
Whatever your plan, the amount that you allocate to retirement income can last a lifetime when it’s invested well and withdrawn in a sustainable, tax-effective way. Regardless of how much you have saved, making it last comes down to keeping your annual withdrawals at the right level. As part of your plan, you may also want to consider the use of life insurance to preserve or create an estate, allowing you to possibly access more capital during your retirement years knowing this part of the overall plan is covered.
Understanding your withdrawal rate:
The amount you withdraw from your retirement savings each year affects how long the capital will last. This chart shows the effects of various withdrawal rates on a moderate portfolio since 1970, a time marked by a severe market downturn, substantial inflation and then a really good market run with high returns.
As you can see, investors who withdrew only 4%-5% percent of their savings annually actually managed to grow their assets while enjoying a predictable income for 45 years. Investors who chose a more aggressive withdrawal rate of 8% saw their retirement savings depleted in approximately 17 years. Your optimal withdrawal rate will depend on several factors, including the rate of return, your tax rate, and whether you want to spend most, some or none of your total retirement savings.
Regardless of how you plan to optimize your retirement savings, now is the time to work with a planning expert who can help you synchronize all the dimensions of your financial plan to forecast your retirement needs and determine how much you can afford to pay yourself in retirement.