Planning your income in retirement
“An investment in knowledge pays the best interest.” – Benjamin Franklin
Some say the greatest risk in retirement is longevity (the risk that you will outlive your money). I have found many people come to me and tell me they don’t know how to predict what income they may have in retirement and if they will have enough to last their lifetime. Many are unsure if the money stays invested when they convert from an RRSP to an RRIF or if it is all put in cash. When it comes to planning your retirement income there are many types of investments you can use for your “streams” of income. It is always a good idea to have some guaranteed streams of income. I will discuss some of the more common ones and how you can plan your income. I did not include rental income from properties, which many people do have, however, if you have properties you can factor this in.
Which investment options are right for you in retirement?
The answer to this question depends on many things:
- Your monthly income needs (allow for extra unexpected costs)
- Do you have any defined benefit pensions?
- Do you qualify for full CPP or any other government benefits?
- How much capital do you have?
- What other assets do you have? (a home that you may downsize, do you have a rental property or a “Snowbird” property in another country)
- What is your tolerance for the value of your capital to increase or decrease? (the volatility of an investment)
- Do you have a spouse that will still need income from your money if you die first?
- Do you have children or someone you wish to leave an inheritance to?
- Do you have a favorite charity or church you wish to leave money to?
Take a snapshot of all of the above issues and then you can begin to plan ahead.
Diversification of income is good
It is wise to distribute the money among several types of investments to create several streams of income. If you were to depend completely on a pension or your company stocks, you could be in for an unplanned surprise in retirement. Recall the many company pension plans that have gone bankrupt, or a successful company that has suddenly gone through hard times and the value of the stock or dividends dropped dramatically.
A case study
Here are is an example of an income plan for retirement (please note the numbers used below are for illustration purposes only, returns vary and government regulations change. For simplicity I have not factored in any inflation in these numbers):
- Alan and Bonnie need$4000 per month to live on in retirement.
- Alan will receive CPP of $880 per month OAS $420
- Bonnie will receive CPP $880 per month OAS $420
- This gives a combined income of $2600 per month leaving a shortfall of $1400.
- They have $400,000 in RRSPs
- They have $50,000 in Tax-Free Savings Accounts invested in high-interest savings account earning 1.5% rate
- They have another $400,000 outside in non-registered cash
How to invest non-registered money: (growth not income is taxable)
- $250,000 – Variable Annuity from a life insurance company with the option for a Guaranteed minimum withdrawal for life – provides a guaranteed 5% income based on the initial investment of $250,000 of the non-registered money. This product will have a named beneficiary, a guaranteed death benefit will bypass the estate and any probate fees. Even if there is no market growth they know that they will have a 5% minimum annual income based on the $250,000. This gives them$12,500 annual or $1,041.67 monthly income.
- $100,000 in dividends and bonds (stocks/bonds or mutual funds). The average bonds and dividends are currently yielding 2% to 6% income, Taking the yield at 3% they would have an annual income of $3000.00 or $250 per month income
How to invest registered money (income is fully taxable)
Convert the RRSP money into an RRIF -(The government regulates a minimum % amount of withdrawal based on age. I am using an 8% example). I suggested the $400,000 be divided as follows;
- $100,000 in GIC’s – 5 X $20,000 each “laddered” – 1 year, 2 year, 3 year, 4 year, 5year (rates vary currently from 1.4% to 3.25%). GIC Laddering gives the opportunity to use ups and downs of interest rates and provide the annual required RRIF payment $8000 annual income or $666. per month
- $150,000 in Life Annuities – I estimate $15,000 annual income or $1250 per month (rates vary according to life expectancy and current interest rates)
- c) $150,000 in a segregated fund account (death benefit guarantee based on the capital invested, bypass estate and probate) or mutual funds or stocks and bonds. Income from this would be subject to the market value on December 31 and depletion of capital. This should provide$12,000 annual income or $1000 per month
Non Taxable: $1,291.67 monthly ($1041.67 from GMW and $250.00 from bonds and dividends.
Taxable Income: $5,516.00 monthly (66,192 annual)
- $2600 from government benefits
- $666 from GIC’s
- $1,250 from Annuity
- $1000 from RIF investments account
If they split their $66,192 annual income, that means $33,096 of annual taxable income each.
This plan keeps Alan and Bonnie below the thresholds for clawbacks on benefits. They have achieved the target income and with some guaranteed products ensures they will not outlive their money.
The excess income can be reinvested and also used to add to the allowable TFSA amount each year. If they deplete the GIC’s and RIF investment account they will still have enough income. Also if one or the other passes away there will still be enough money for the surviving spouse.
This is a quick, simplified example of how you can plan your retirement income. What do you think?