LIVE OFF YOUR NEST EGG
Retirement Investing Strategies to Give You Income
If you’re close to retirement or have already retired, you'll know just how important is it to plan for a different approach to your finances. The retirement strategies we cover here, including Bellwether’s disciplined dividend growth strategy, will help ensure you don’t have to pinch your pennies to feel confident your money will last. You’ll also learn why inflation is the enemy of investment income and how to minimize your taxes in retirement.
But investment and tax strategies aren’t nearly as effective if you don’t have a retirement plan in place. That’s why we also help you select your retirement goal, estimate your expenses, figure out your time horizon and determine all your income sources.
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PART 1 Income investing
What investment strategies will work for me?
For most of us, retirement means a switch in investment strategy. You’re no longer interested in swinging for the fences.
Instead, you’re relying on one base hit after another to bring you home.
It used to be that you could rely on a traditional fixed income strategy—GICs, bonds and treasury bills—to provide that kind of steady, consistent, low-risk retirement income. No more. Today, we live in an uncertain world of rock-bottom interest rates and financial market unrest. The signs are everywhere. Your bank is advertising a 2% return on a 1-year GIC. Or your broker tells you the best she can do for a “safe” investment is a Government of Canada bond that’ll get you 1%.
To achieve the annual yields required to sustain us through retirement in this economic climate takes innovative strategies—and a trusted investment manager who not only has access to them, but the discipline to stick to your plan.
In this section, we’ll give you a quick overview of the types of investments that are usually held in retirement today, talk about the impact of inflation and share some details of the specific investment strategies Bellwether offers our retired clients.
Types of income investments
At the most basic level, there are three types of investments (or “assets”) that make up a portfolio.
The first is equities (also known as stocks). When you own equities, this usually refers to holding common shares of a corporation. Equities provide capital growth. If they’re dividend-paying stocks—meaning they pay a monthly or quarterly amount to shareholders—they also provide income. Most investors are limited to holding shares of publicly traded companies, but private equity investment opportunities are available to some investors, including Bellwether clients. Equities generally provide higher rates of return over time, but values can fluctuate with no guarantee of capital.
The next type of investment is fixed income. These investments are focused on preserving capital and generating income, which is why they’re traditionally attractive to retired investors. Corporate and government bonds are the most widely known fixed income investments. They often guarantee capital on maturity and offer a fixed income payment. Preferred shares provide a set dividend income that has tax advantages. There are also alternative fixed income investments, such as private lending. These are typically available only to large institutional investors, such as pension plans, but Bellwether has secured access to these opportunities for our clients, too. Alternative fixed income investments have higher interest rates than traditional fixed income approaches, but need to be managed carefully to minimize risk.
The last “class” of investments is cash and cash equivalents, including money market funds and treasury bills. These are low-risk, interest-bearing investments that were the go-to for retirees in decades past, when interest rates were high, and are still held by very conservative investors who are unaware of the impact of inflation and tax on the true value of their investments. Most professionally managed portfolios hold cash strategically when safety of capital and liquidity are required.
The importance of inflation
Inflation is the rate at which the cost of goods increases each year. It’s the reason a loaf of bread cost $0.27 in 1965 and costs more than $2.50 today.
Put another way, if you had $100 in 1968, in 2018 it was only worth $14.02 and today it’s worth even less. Every year we can buy less with a buck, and we’ve got inflation to thank.
Inflation has a serious impact on savings. If you keep your savings under the mattress, it’s obvious that you’ll be able to buy less with the money 20 or 30 years down the road. But even if you invest the money, if your annual return is less than inflation (which has averaged around 2% for the last couple of decades in Canada), you’ll eventually have less money to spend than you started with.
Pro tip: If you’re worried you’ll run out of money during retirement or are a risk-averse investor by nature, you’ll be tempted to “play it safe” with your investments, thinking that preserving capital is more important than better returns. But the “safe” options (think treasury bills, money market funds and bonds) may not make enough to cover inflation, leaving you with less when you need it most.
Bellwether’s income investment strategies
If your investments are a key source of retirement income, steady, reasonable returns and reduced volatility are the order of the day. Here are Bellwether’s own investment strategies to accomplish those investment goals.
Global Dividend Strategy – Public equity strategy
We created—and trademarked—our global dividend strategy because we felt affluent investors deserved a carefully researched, time-tested, experience-based approach to their portfolios. Of the more than 4300 companies in North America we could invest in, we select ones that have strong balance sheets, proven sustainable earnings and dividend growth. The overall approach is conservative, with the portfolio mix for each client determined by their individual circumstances and risk tolerance.
Global Real Estate and Infrastructure – Private equity strategy
This strategy invests in private real estate and infrastructure assets (for example, utilities, toll roads, airports and data centres) around the globe, offering low-cost access to private equity investments that are usually only available to very large institutional investors. This strategy is used to generate income and further reduce the risk associated with public market equities.
Alternative Fixed Income – Private fixed income strategy
This strategy invests in niche private lending opportunities (for example, real estate lending, supply chain financing, short-term private asset-based lending and royalty streaming). It offers robust risk controls to protect capital and higher returns than traditional fixed income options when interest rates are rising. It’s another strategy that is typically only available to large pension plans and other big institutional investors—but you can get it through us.
Pro tip: In order to be truly strategic, these income-generating investment strategies must be combined in your portfolio in a way that’s personalized to your retirement objectives and risk tolerance. Work with your investment team to draft a personalized investment policy statement and review it at least annually. Not only will this give you peace of mind that your portfolio will meet your needs now and in the future, but your investment team will be empowered to tactically allocate assets within your portfolio to ensure it is rebalanced to correct for market changes.
Find out if you're on the right track with a free portfolio review.
PART 2 Retirement and taxes
How can I keep more of my money myself?
If your retirement strategies aren’t based on a plan to minimize tax, you may end up spending more to keep Canada Revenue Agency happy than you do to keep a roof over your head or food on the table.
You’ve heard the expression “location, location, location” to refer to real estate, but it has relevance to retirement investing as well. Thinking strategically about where your money is held—RRSP, spousal RRSP, TFSA, RRIF, cash account or other account— can minimize your taxes. A financial advisor with tax expertise will also consider the type of investment that is held in each account, since capital gains, dividends and interest income are each taxed differently in Canada, and capital gains and income earned from global investments can have tax implications as well.
Pro tip: Perhaps the most important tax-related action you can take in retirement is to create an investment withdrawal strategy. That way you’ll know which accounts you’ll withdraw from when. This will help you avoid higher taxes later in life, when you may need more money for housing or healthcare.
PART 3 Cash flow in retirement
How much money will I need?
Now that we’ve discussed income investment strategies and taxes, it’s a good idea to take a step back and look at the bigger picture. This is called retirement planning, and the logical place to start is with an estimate of the money you’ll need for the retirement you’ve imagined. These four steps make it simple and straightforward to come up with a reliable number.
Step 1: Choose your goal
The amount of money you’ll need during your retirement years depends, in part, on your goals. We find our clients usually have one of four retirement goals (conserve, live well, leave a legacy, and spend it all) with each one being associated with a different approach to income and expenses.
Pro tip: Sometimes retirement goals are motivated as much by personality as by financial reality. If you’re naturally cautious and problem-focused, you may worry about retirement and dream small, even though your investments are doing well. Glass half-full clients or those who like to indulge in the finer things may be overly optimistic about how long the money will last. An experienced financial advisor can help, providing an objective perspective and coaching you on how to manage expectations and adjust your approach to retirement spending.
Step 2: Itemize your expenses
Now that you’ve established your big picture goals, you’ll be well set to dig into the details of your expenses.
Most of us can expect our day-to-day expenses in retirement to decrease somewhat compared to our employment years, but the actual amount we’ll need to live on will vary depending on our dreams for our retirement and the reality of our health, housing, debt and taxes. Anything that makes our dreams come true is considered a “discretionary expense”—in other words, optional. Food, healthcare, clothing, transportation and interest payments—basically anything that's a necessity—are “non-discretionary.” You may be able to minimize these expenses, but they’re unavoidable.
Pro tip: Just when we think we’re about to hit a retirement home run, life can throw us a curve ball. That’s why it’s wise to have an emergency fund, to the tune of three to six months of living expenses, to help in the event of unexpected health, housing or transportation-related expenses. You may also want to take a look at your health, disability and life insurance to make sure you’re covered for unforeseen events.
Step 3: Estimate your time horizon
How long will you live? When it comes to financing your retirement, that’s the key question you’ll need to answer. On average, Canadian men live to 79.9 years and Canadian women to 84.0 years, according to Stats Can. If you don’t think of yourself as average, you could try this life expectancy calculator created by the Canadian public health researchers and clinicians at Project Big Life.
Pro tip: Sometimes your time horizon is longer than your own life expectancy. If you have a younger (or healthier) spouse, it might be their life expectancy. If you have dependents that you want to ensure have an income after you die, consider that, as well.
Step 4: Use our retirement calculator
Retirement calculators are excellent tools to use when you’re looking for a retirement reality check, because they do the math for you. We've created one that answers the question "Can I afford to retire?" Plug in your numbers (for example, your current age, age at retirement and retirement savings to date) to see whether your expected income in retirement will cover your expenses, and how long your savings will last.
Pro tip: The accuracy of any retirement calculator will depend on the accuracy of the numbers you enter. Give yourself enough time to dig up investment statements, calculate your expenses and estimate your private pension value (if you have one) and your monthly CPP and OAS pension. That way, you can feel more confident that the information the calculator gives you is the best estimate possible.
PART 4 Income sources in retirement
How much will I pay for retirement?
We often think of our retirement in terms of “have I saved enough?” but the better question to ask is “how much money can I count on every year after I retire?” Here are five sources of retirement income to consider.
Retirement today is different from previous generations. Gone are the days of the retirement party where you say goodbye to Joe in Accounting forever and vow to never work another day in your life. Instead, many retirees use their professional credentials and work experience to set up consulting or other self-employed businesses. They get to maintain their professional contacts and continue to develop their skills doing work they love—only now it’s when they want to, not when the boss tells them.
If you have an interest in a business or own an investment property, these are potential sources of income. But they can also be a drain on your finances if you’re carrying a large mortgage, the rental market tanks, you have large capital expenses, or you have a tough business year. If you own your home, you can consider that a source of income if you downsize and sell or rent it.
There are two types of workplace or “employer-sponsored” pension plans: defined benefit and defined contribution. A defined benefit pension offers you a guaranteed monthly payment after retirement, based on how long you were with the company and your salary. This is the type of pension we automatically think of when we hear the word “pension”—a big, union-negotiated benefit such as teachers and government employees get—even though they are becoming much less common. A defined contribution plan or group RRSP, in contrast, doesn’t guarantee a benefit amount when you retire. Your employer must contribute at least 1% of your salary, though many have matching programs.
Many Canadians are eligible for both Canada Pension Plan and Old Age Security benefits after retirement. The average CPP benefit was $735.21 a month in 2020, but the amount you’ll receive depends on a number of factors, including when you start drawing on your pension. The full Old Age Security benefit was just over $600 a month in 2020; to receive the full amount, you must meet certain eligibility requirements
RRSPs, tax-free savings accounts and non-registered investments are all additional sources of income in retirement. The asset mix of these investments—the proportion of equities, fixed income, and cash or cash equivalents you hold—should be determined by your objectives, expectations of risk and return and individual risk tolerance. As we mentioned earlier, the type of investment that's held in different accounts should be carefully planned to minimize taxes.
Pro tip: If you have a defined contribution pension plan or group RRSP and you haven’t yet retired, you may be able to manage this pension yourself rather than rely on the limited options available through the third party investment manager chosen by your employer.
PART 5 Retirement mistakes
What have I overlooked?
Simple mistakes can negatively affect your retirement income. Of course, if you’ve thought carefully about your retirement strategies and have the discipline to stick to the plan, these mistakes won’t be an issue for you. But forewarned is forearmed. Watch out for everything from not having a big picture retirement plan to over-investing in bonds to withdrawing too much from your investments.
How can Bellwether help?
Retirement strategies are complex, but Bellwether’s team of family wealth advisors and portfolio managers make them feel simple—and that’s probably the most important way we help our retired clients. Together, we’ll help you craft an investment portfolio that’s tailor-made to accomplish your goals and manage the day-to-day of your investments to give you peace of mind. We can coach you on retirement decisions, help you with estate planning, put together a charitable giving plan and minimize the taxes you’ll pay. And when life’s ups and downs tempt you to take a detour from your chosen path, we’ll help you stay on track. Like they say, you only live once—and your Bellwether team will help you get it right the first time.
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