Assuming that you’re nearing or into retirement, you must have done a number of things right to get there. You worked, saved and invested for the future. Your investments grew over time, probably going up and down with the market, but you stuck with it. And you probably made use of government programs to enhance your efforts: pension, RRSP, DPSP, TFSA and tax strategies. Now you need a different set of strategies to navigate retirement.
Different Strategies for Success in Retirement
The strategies that you used to get to retirement are not the same as the strategies that will provide retirement income from your investments without the fear of running out. Investments that were positioned for growth will now need to focus on income and consistency. Rather than using government programs to accumulate wealth, it’s time to use the tax system to minimize your costs. And you’ll want to ensure it lasts your lifetime with no risk of running out.
The Retirement Red Zone
The five years before and after retirement are called the “retirement red zone.” This ten-year period is particularly important to use suitable strategies for retirement. Market fluctuations have an outsized impact on your investment values. Before that, while you were saving for the future, buy and hold would get you through market corrections. Trying to time the market can cause investors to sell after a sudden drop, then wait for the market to recover before buying back in. If they do that, they’ve sold low and bought high.
Financial advisors usually recommend either buy and hold or, better yet, adding to investments during periods of volatility. Buy and hold works because, whether the market moves a little or a lot, the average return is the same. Adding to investments or “dollar cost averaging” purchases more of the investment while the price is lower. This allows you to benefit from market volatility and grow the value of your investments.
The opposite is true when drawing retirement income. When you sell investments, the market value matters. It determines how much investment remains to grow or recover with the market. The sequence of returns refers to whether market returns in the first years of retirement are positive or negative. Having negative or low returns in the years just before and just into retirement can cause permanent loss of value to your investments. It’s almost impossible to recover if you sell while the markets are down.
The Strain on Your Investments
While working toward retirement, financial advisors usually recommend focusing on higher growth and on capital gains. Growth is important to help you reach your goals sooner. Capital gains are among the most tax-efficient forms of growth. And we all know it feels good to see account balances grow year after year.
When you begin to draw retirement income from your investments, your goals shift from growth to income. It makes sense to align your investments with your goals. Selling investments can impact the long-term ability to produce income, especially if you experience a market reversal early on. It is possible to reduce the strain on investments with part-time or casual work before fully retiring. Once retired, drawing income from either severance pay, from a retiring allowance or by starting government pensions earlier can also reduce the strain on your investments. Whatever investment products you use, it helps to choose investments that produce some form of income. That way, you reduce the amount that needs to be sold to create cash flow.
The Risk of Running Out
People who have worked hard and saved for years deserve to enjoy freedom in retirement, without the fear of running out. Not many employers offer a guaranteed pension plan any more. There are a number of tools that you can use to guarantee that your income will last your entire lifetime. These include government pensions, buying your own pension (annuity), or investing in funds that include a lifetime income guarantee. Or you can keep your withdrawal rate low enough that the chances of running out are almost nil. A good advisor will make sure you have a strategy for retirement income to last your lifetime.
The Leakage of Taxes and Costs
I help my clients optimize their strategies for income in retirement by controlling leakages. Without losing sight of returns, I recommend investments to keep down the cost. Many investment companies offer cost savings based on account size. I advise taking advantage of government programs and tax benefits to use every legal means to minimize taxes payable. Planning orderly withdrawals from registered, non-registered and tax-free investment accounts makes it possible to balance yearly taxation with lifetime taxation.
Keep it Flexible
The strategies for retirement above help to deal with the things we can control. Uncertainty in life, in tax regulations and in market conditions means we must be prepared for the unknown. You don’t know how long you’ll live, or how long you’ll be healthy and strong enough to enjoy your retirement. You may not know if your spending will increase or decrease. I manage this uncertainty by maximizing flexibility and keeping options open. If two strategies have a similar cost and risk, I recommend the one with greater flexibility.
The strategies for retirement that address the risk of running out of money are different than the strategies you used to save and invest. It becomes more important to ensure that market corrections don’t sink your investments. There is greater complexity in keeping up with tax regulations and in ensuring that you won’t outlive your money. Working with a financial advisor who specializes in retirement planning strategies can give you the best chance for success so that you can avoid worry and enjoy the freedom that you’ve earned.
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