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tax matters

It was veteran comedy writer Gene Perret who said about retirement: “It’s nice to get out of the rat race, but you have to learn to get along with less cheese.” For some, retirement can be like that. These folks might think about retirement sort of like a long vacation in Las Vegas, where the goal is to enjoy your time to the fullest, but not so fully that you happen to run out of money.

The good news? If you’re smart about your planning, you’ll have a stable supply of cheese in retirement. So how do you make that happen? Today, I want to talk about an approach to investing for those retirement years.

The risks

Whether you’re in retirement, or heading in that direction, it’s a good idea to understand the key risks that every retiree will face – and there are three, according to author Wade Pfau. First, there’s longevity risk. This is the risk that you live longer than expected and run out money before running out of retirement.

Second, there’s sequence-of-returns risk. This is the risk that you’ll need to draw meaningful amounts from your portfolio during market downturns. This can be particularly bad if your portfolio declines in value for an extended period in your early years of retirement.

Third, there’s inflation risk. This is the risk that your savings will purchase less and less each year and won’t allow your spending to keep pace with inflation.

The approach

How can you deal with the three key risks above? Consider a “safety-first” approach to investing your retirement savings. How? By figuring out the minimum income you need in retirement, and ensuring you achieve that level of income, indexed to inflation annually, with the greatest level of certainty. Last week, I talked about creating an “Essentials Budget” for retirement that represents the minimum level of income you’ll need. This is your “income floor."

Let’s continue with an example from last week. Jack and Jenny are a couple living in Ontario, both 45, who plan to retire in 20 years at the age of 65, and want their money to last until 95. They’ve prepared an Essentials Budget of $60,000 annually in retirement. They’ll need $70,000 before taxes ($35,000 each) to have $60,000 after taxes each year to meet their essential needs, or income floor.

The safety-first approach to investing suggests that you should use guaranteed income streams (such as Canada or Quebec Pension Plan (CPP/QPP), Old Age Security benefits (OAS), and defined benefit pension plan benefits), to the extent possible, to meet your income floor in retirement. For Jack and Jenny, they expect to receive $34,720 in total government benefits in retirement (CPP and OAS benefits), so they’ll need an additional $35,280 ($70,000 less $34,720) of income annually to meet their income floor in retirement.

How can Jack and Jenny create enough additional income to meet their Essentials Budget, or income floor, in retirement? They could delay receiving their CPP/QPP and OAS benefits, up to the age of 70, to increase the amounts they’ll be entitled to each month. They might consider annuities to provide guaranteed income, or investing conservatively in other ways to meet their income floor.

The nuances

If you’re starting late in saving for retirement, you may need to take a little more risk in your investing to increase returns and create the amount of capital you need at your retirement date. I wrote last week about how to figure out the amount of capital you might need.

I also wrote about creating an “Aspirational Budget” (in addition to your Essentials Budget), which represents a greater level of spending that could allow you to achieve aspirational goals, not just meet your essential needs. When it comes to capital earmarked for aspirational spending, you can afford to take more risk and aim for higher returns since your essential needs will be met by your more conservative portfolio.

If you’re younger, the two-budget approach may be a little conservative. So consider taking more equity risk until about the age of 40 or 45, then switch to separate portfolios for your Essentials and Aspirational budgets.

In another column earlier this month, I referred to eight core strategies to save for retirement. In addition to government and employer pensions or benefits, I talked about saving through registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), non-registered accounts, life insurance and real estate. Jack and Jenny will likely use multiple methods to ensure they achieve their income floor, opting for safer investments to meet their Essentials Budget, and more aggressive investments to achieve their Aspirational Budget.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at