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Drawing a monthly paycheque from your investment portfolio is simple if you're wealthy enough – load up on blue-chip stocks and just sit back and collect the dividends. A 5-per-cent dividend payout on a $2-million portfolio is $100,000 a year.

Because most people don't have that kind of money, planning is needed, investment advisers say.

"Most Canadians will use a significant portion of their capital over their lifetime if they live to 95," says Clay Gillespie, an investment adviser at Rogers Group Financial in Vancouver. "The most important thing is to make sure the money will be available when you need it regardless of market conditions."

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Investors need to look beyond yield when calculating retirement income. All too often, people determine how much income they need and then find a product that generates it. "I'm not a fan of that," he says, because income needs tend to rise over the years with inflation, and the yield may not keep pace.

Instead, he urges clients to look at total return: dividends, interest income and capital growth. This is the pool from which you will draw your retirement income. Dividend growth will help shield you from inflation, while capital gains will help counter longevity risk – the risk that you will outlive your savings.

The biggest risk may be the inevitable drops in financial markets, the most recent example being the financial panic in 2008.

"After 2008, people had to work two or three more years because their account balance was down so much," Mr. Gillespie recalls. Clients who adopted his strategy did not.

Mr. Gillespie's approach, devised after the tech meltdown, is simpler than it may appear. You start five years before retirement because that's roughly how long the average market cycle lasts.

"The day you retire, you want to make sure you have three years' worth of income available or maturing," he says. "If you wait until you retire and markets are down, you're toast."

The first year's income can be in a savings or money market account, while the remaining two years' worth can be in guaranteed investment certificates. If stock markets are buoyant at the time, these savings can be left intact.

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If markets are weak when you first retire, you can draw on the savings account. If the weakness persists a second year, you can draw on the maturing GIC. By doing this, you shouldn't need to sell stocks into a falling market, a hit most conservative portfolios may never recover from.

"This way, the market doesn't dictate your retirement date," Mr. Gillespie says.

If markets rebound in the third year, you can sell enough stock to replenish the spent funds so that you always have three years' cash needs in reserve.

What if they don't rebound? Even in long bear markets, there are periods when stock prices are up and investors can sell, he says. "The longest [unbroken] correction going back to 1929 has been 18 months."

Mr. Gillespie says his firm's analysis – based on back-testing of portfolio performance – showed that portfolios arranged this way lasted about 25 per cent longer. "That's about seven or eight years, which is a big deal for a retired person."

Income tax is a key consideration for people drawing on their savings, says Kurt Rosentreter, an investment adviser at Manulife Securities in Toronto.

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If the clients are a couple, each with registered retirement savings accounts, tax-free savings accounts and non-registered investments, they face six different tax impacts, says Mr. Rosentreter, who is also an accountant.

"We sit down with the tax returns right beside the portfolio statements, looking at average and marginal tax brackets and what other income they have, whether Canada Pension Plan or company pensions," he says. Funds are withdrawn in the most tax-efficient way.

Mr. Rosentreter advises clients to put one year of income into a savings account. Any more could eat into returns, he says. The remaining portfolio is arranged according to the client's needs and risk tolerance.

Stability of cash flow is also important. If a client needs $24,000 a year from his holdings, Mr. Rosentreter arranges to have $2,000 a month automatically transferred to the client's chequing account.

"When people give up a paycheque and try to live off investment income, the lumpiness can be challenging," he notes. Income is not always the same. The automatic transfers smooth out the cash flow, which he says is important psychologically.

The type of investments held also will affect the withdrawal strategy. Traditionally, stocks have been viewed as long-term investments, for example. But with interest rates so low, dividend-paying stocks comprise a larger part of many investors' portfolios. Higher-yielding securities such as preferred shares and real estate investment trusts are particularly popular. These can be held directly or through a basket of securities such as exchange traded funds.

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Mutual funds, in comparison, need to be watched closely because so many of them have high management fees. Mr. Rosentreter says that investors need to ask: Do they add value for the extra fees?

"If they can't beat the index over several years, then don't buy them," he says. This is even more important for retired people trying to live off their savings. High-cost mutual funds that don't add value are "particularly poor in creating cash flow for retirees," he says.

So-called income replacement funds – targeted to retired people – spark Mr. Rosentreter's ire. Such mutual funds offer a relatively high payout, part of which is your own money.

"It's a dangerous house of cards," he says. "They are arbitrarily setting a yield that is going to appeal to anybody in need of cash flow, but they're funding it by paying you back part of your own capital." While he acknowledges such funds may be tax-efficient, "they are eroding your foundation."

Yields on these funds should not be compared to those offered by bonds or stocks, he says. "It's not an apples-to-apples comparison." Securities such as preferred shares generate a return on capital, while income-replacement funds give a return of capital.

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