Tips to make your retirement funds last

As ever larger numbers of the boomer generation start to retire, fixed income options are no longer delivering the way they used to.

As ever larger numbers of the boomer generation start to retire, fixed income options, once the staple of retirement cash-flow planning, are no longer delivering the way they used to. Add to this that we’re living longer, although a welcome development, means those of us planning to rely on Registered Retirement Income Funds (RRIFs) for income may need to take on more risk to generate the returns we need to cover our retirement income needs.

Consider three main risks:

1) Market fluctuations: could lead to a sequence of negative returns, and once retired there may not be enough time to recoup the lost investment value.

2) Inflation: The erosion of the purchasing power of your savings accelerates as inflation rises.

3) Longevity: Our longer life spans increase the risk of running out of money, so people should plan for income to last to age 95 for men, and 97 for women.

Using average life expectancy of 79 for men and 83 for women, there’s a 50 per cent chance people will still be alive when their money runs out, which is far too much risk.

Wealthier investors who don’t rely on RRIFs typically take one payment at year’s end. This allows them to grow their money tax-free as long as possible. But for those who prefer to treat a RRIF like a monthly pension payment, consider equities that produce monthly cash flow, such as balanced funds or publicly traded REITs. Alternatively for those wanting the entire RRIF payment at the beginning of each year, they should consider a five-year laddered bond strategy, as one will come due every year as needed.

While risk tolerance usually decreases in the drawdown years, being too conservative in the current environment may not be the best strategy. Recent changes help a bit. Under the old rules, an investor turning 71 was required to withdraw a minimum of 7.38 per cent from her RRIF. But the 2015 Federal Budget plans to lower that mandatory RRIF rate and moved the age at which retirees reach the top 20 per cent withdrawal rate from 94 to age 95.

Still, if a large percentage of your investments are stuck earning 2 per cent, there is big risk you’ll encroach on your principal too quickly.

The annuity option: Combining today’s longer life spans and less-than-stellar fixed income yields may make annuities a good option for some investors. Here’s a simple way to determine if this is right for you. Take for example someone with $425,000 of retirement savings, with annual supplemental income needs of $15,000, and a 30-year-time horizon. The yearly withdrawals will drain their savings around year 20, a decade shy of their 30-year target. Even at today’s low interest rates an annuity can be a good option here to meet or supplement one’s lifetime income needs.

RRIF nuts and bolts:

1) We Canadians are legally required to convert our RRSPs into RRIFs by December 31 of the year we turn 71, though we can do it earlier. This transfer is not a taxable event.

2) RRIFs are subject to yearly withdrawal minimums. The younger one retires, the lower the RRIF minimum.

3) An investor with a younger spouse or common-law partner can use their spouse’s age to calculate the minimum withdrawal. This would enable them to shelter more income in the RRIF.

4) An investor must be committed to withdrawals after setting up the RRIF.


Just Posted

Watch: Gravel truck turns into wrong off-ramp at Highway 2 Ponoka

The new Highway 2 and Highway 53 intersection at Ponoka caused some confusion for one driver

Stettler armed robber convicted in court Oct. 12

Jayson Marshall gets over two years in jail

CORRECTED Donalda Creamery plans on tap Oct. 23

Architects to answer public’s questions about plans

WATCH: ASIRT investigating officer-involved shooting during crime spree

Shots fired on two occasions during incidents, one suspect remains in hospital with serious injuries

Drumheller RCMP investigate human remains

Police find human remains in burning vehicle near Morrin

VIDEO: Tragically Hip singer-songwriter Gord Downie dies at 53

Downie had been fighting brain cancer for over a year

Police officer hit by car, stabbed in Edmonton attack back on job

Const. Mike Chernyk, 48, returned to work Thursday

Berry disappointed: Bear tries to eat fake fruit on woman’s door wreath

A Winnipeg woman has taken her berry-embellished wreath down, after a hungry bear visited her porch

All three victims identified in Fernie arena ammonia leak

Wayne Hornquist and Lloyd Smith were from Fernie and Jason Podloski from Turner Valley, Alta

4 B.C. prisons install body scanners to combat drug smuggling

The scanners are aimed to combat the smuggling of contraband including weapons and drugs

Outspoken Mountie assigned to admin duties for refusing to shave goatee

The 15-year veteran of the force said he believes the RCMP is targeting him

Victim in fatal ammonia leak remembered for his passion and smile

Friends and colleagues remember Lloyd Smith as someone who was always willing to help people

Canadian planet hunter seeking alien life

‘The shifting line of what is crazy’ says Toronto-born astrophysicist

Firefighter dies battling wildfire in Alberta

“It’s terrible. It will devastate the community for a while here. He’ll surely be missed.”

Most Read

Weekly delivery plus unlimited digital access for $50.40 for 52 issues (must live within 95 kilometers of Stettler) Unlimited Digital Access for one year for $50.40 Prefer to have us call you? Click here and we’ll get back to you within one business day.