Getting ready to retire can bring a huge shift in your life. For years, you’ve been working and saving for different financial goals. You’ve been travelling a familiar road with a specific, yet unseen destination in mind: your retirement. Now the off-ramp comes into view. And you may find yourself asking, ‘How do I go from what I’ve been doing for 30+ years to what I’ve dreamt of doing after I retire?’
At the same time, you’re making a transition from saving to spending your savings. This raises more questions, such as:
- How do I create a stable, tax-efficient income after I retire?
- How do I create enough income to last my whole lifetime?
This article explores three ways you can do both. You could adopt one or all of these approaches as you get ready for and enjoy your retirement.
With this approach, you divide your portfolio into different time horizons or buckets. You set up a short-term bucket that holds a number of years of income in relatively safe investments. You can then use your other buckets to pursue different levels of growth. Over time, you draw from your longer-term buckets to replenish the short-term bucket. Since a portion of your portfolio is always focused on growth, a bucket strategy can increase your confidence that you’ll have enough income to last.
Watch this 3-minute video on the bucket approach now.
Retirement portfolio solutions are managed for you by a team of investment professionals. They invest your savings in a carefully selected mix of investments that will be adjusted over time as markets change. The goal is to balance your need for tax-efficient, regular cash flow in retirement with growing your nest egg along the way. As with most mutual funds, you can easily set up regular withdrawals by automatically selling units.
3. Tax-efficient cash flow options
Some retirement funds offer managed payout options. They offer the strengths of a
managed retirement portfolio
solution combined with a
managed payout strategy. You can arrange to receive regular monthly cash flow without needing to sell your units.
RBC Retirement Income Solution - T5 Series will automatically pay out 5% of your investment in equal monthly distributions.
RBC Managed Payout Solutions offer 5%, 6% and 7% options. Payout amounts are reset annually.
Distributions from these funds are typically tax efficient. A portion of the distribution is usually a
return of capital (ROC) – a return to the investor of their own initial investment. A ROC is not taxable in the year you receive it, but does increase capital gains in the year you sell the investment.
Choosing an approach that fits your unique needs will help you stick with your plan. Consider these three factors to get started.
1. How will you transition to creating your retirement income?
To determine the best approach for you, ask yourself the following questions:
- How much income will you need and for how many years?
- Will you still need to see your investments grow in retirement? What is a good annual growth target for you?
- Which investments will you continue to hold – while ensuring you stay within your comfort level for uncertainty and risk?
- What are the tax consequences of selling investments as you retire?
- Do your current investments offer a T Series that enables a smooth transition to retirement income?
2. Are you able to adjust your income over the years, as needed?
All three strategies allow you to adapt your income to some extent. You can also easily set up regular, automatic withdrawals. However, also consider:
- With bucket portfolios: watch the overall risk level of your portfolio as you move assets from one bucket to another. Be sure to maintain a level of risk that’s right for you.
- With retirement portfolio and managed cash flow solutions: monitor how much income you are withdrawing each year. You want to ensure you can sustain your income over many years. You may also need to sell units if you have a higher withdrawal rate.
3. Will you need to rebalance your portfolio or is it done for you?
Sometimes changes in markets may make it necessary to review and rebalance your investments. For example, if equity markets rise, you may have more exposure to stocks than you originally planned. This can raise the level of risk in your portfolio. Or, if you sell equity mutual funds or stocks to create cash, this can tip your level of risk in the other direction.
The question is: who owns the responsibility to monitor and make changes?
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Bucket portfolio
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Retirement portfolio and cash flow solutions
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You. An advisor can help, if you have one.
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Rebalancing will be done for you automatically if you have a mix of investments.
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Proper planning is key
Each of these strategies require an accurate estimate of your expenses in retirement and a sustainable withdrawal rate. Also remember that health changes can add unexpected costs to your budget.
You will also need to coordinate your personal savings with your government retirement benefits. This can be complex to sort out. Taxes and withdrawal rules vary based on the source of income.
A financial advisor can help you create a plan that works for you. Proper planning can help ensure you will be able to create the income you want and need to live comfortably after you retire.
Taxes can really affect your retirement income. Learn how taxes may apply to withdrawals as you spend in retirement.
Key take-aways
- Economists look at a number of indicators or sets of data to determine whether we’re in a recession. More often than not, slowing growth in the economy plays a role.
- Every business cycle includes a period of recession. Some recessions are shorter, some longer. The impact also varies.
- Recessions can create short-term pain in the market. But they don’t tend to disrupt investors over the long term.
Additional resources