Throughout your working years, you have likely heard about the importance of saving time and time again. By the time you reach retirement, you may have gotten pretty good at saving. But it may be time to shift your focus from building your savings to sustainably generating income. For most new retirees, generating income from retirement savings is a new venture and a potentially daunting task. In this article, we will describe some things to consider and common ways that retirees generate income.
Before you determine how you will generate retirement income, you should have an understanding of exactly what expenses you may incur. Make sure you consider your non-discretionary (required) expenses—such as rent, food, utility bills, debt payments and taxes. You’ll also want to consider discretionary spending, which can include travel, hobbies and any support you’d like to offer to children, grandchildren or charities.
Once you have an estimate of how much your retirement income you might require, you can start make a plan to fund those expenses.
There are many ways to generate income in retirement, we will break down some of the income sources into two categories, non-investment and investment-based income.
Canada Pension Plan or Quebec Pension Plan: This is an earnings-related pension scheme based on average lifetime salary. If you have started collecting the Canada Pension Plan or Quebec Pension Plan, you may be familiar with how much you can expect to receive. If you haven’t started receiving benefits yet, you can visit the Government of Canada’s website to get a better understanding of how much you can expect to receive.[i] To qualify for full benefits, you must meet age and contribution requirements. Age requirements are generally met at 65, however you may be able to take reduced distributions at 60 or increased distributions up to 70. Contribution requirements generally require around 39 working years.[ii]
Old Age Security: This is a basic pension plan that is available for eligible seniors in Canada who meet the required legal status and residence requirements. In order to qualify, you must be retirement age and have lived in Canada for a certain amount of time as an adult. Those who do not meet the requirements are eligible for a partial pension as long as they have lived in Canada shorter amount of time. If you rely solely on Old Age Security to fund your retirement may be eligible for additional assistance through the Guaranteed Income Supplement. If you decide to retire later, you may be able to delay receiving the Old Age Security for a few years after retirement age.[iii]
Salary: Do you plan to work in retirement? If so, you’ll need to estimate how much money on average you can expect to receive from employment. This income does not include money you plan to make from a business investment. Rather, you should just consider compensation from your employer or business for your labor.
Pension: If your employer offers a pension, you should determine on average how much you can expect to receive. Will it increase or decrease over time? Note that Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are not pension plans. Rather, they are types of accounts that hold funds you’ve invested over the years and will be able to control in retirement
Business or Real Estate: If you own all or part of a business or investment property, it could provide you with non-investment income. When calculating how much to expect, consider these sources of income can be more susceptible to market conditions than a guaranteed pension.
While non-investment income can help fund your retirement, you may require additional funds to maintain your current lifestyle in retirement. The following are just some of the investment income sources available.
Stock Dividends: These are distributions of companies’ earnings paid to shareholders. Dividend payments can be issued as cash or additional shares. Dividend payments are decided entirely at the discretion of the company’s board of directors, meaning they can increase or cut the dividends at any time.
Bond Coupons: Bonds can be issued by countries, municipalities or companies looking to borrow money. Look at a bond as a loan and you are the one loaning the money for a specific rate over a specific time period. Traditionally, you receive ongoing interest payments owning the bond, and when due, the company repays you the principal of the loan. Some investors are attracted to bonds because of the predictable yields they produce. However, bonds can come with their own set of risks, such as the risk that the borrower defaults.
Homegrown Dividends: We like to call selectively selling stocks for cash flow “homegrown dividends.” It can help you maintain a well-diversified portfolio appropriate for your goals and objectives—and has the additional benefit of being a flexible, potentially tax-efficient way to generate cash flow. Selling stocks in a taxable account may afford you greater flexibility in balancing realized gains and losses. You may be able to sell “down” stocks as a tax loss to offset capital gains you might realize, or you can pare back positions that have grown too large.
Insurance-Based Investments: In Canada, life insurance products are available to provide monthly or ongoing income for retirement. In some cases, you can purchase an investment product and receive lifetime payments based on the performance of the underlying assets or a predetermined/ fixed rate. While these payments may sound enticing, insurance products can be complex, illiquid and difficult to understand. Before purchasing an insurance product as an investment, it is imperative that you fully understand the terms and conditions of the contract.
Planning for retirement is a daunting task and developing a strategy to pay for retirement can be incredibly challenging. Before you retire, you may not be aware of what expenses you can expect to pay or how to structure an income generating portfolio in retirement. Luckily, you do not have to face retirement alone. If you would like guidance or assistance selecting the right asset mix to generate income, Fisher Investments Canada can help. Feel free to reach out and speak with one of our qualified professionals today.
[i] Source: Government of Canada as of 6/18/2019. Canadian Retirement Income Calculator https://srv111.services.gc.ca/GeneralInformation/Index.
[ii] Canada Revenue Agency (CRA), as of 06/17/2019. Savings and Pension Plans. https://www.canada.ca/en/services/taxes/savings-and-pension-plans.html.