Retirement Income Centre
When it comes to retirement, there is no magic number
Why Dynamic’s Paycheque Portfolio™ approach focuses on income, instead of account values
If you check your news feed or social media these days, you’ve probably been bombarded by articles on the state of Canadian retirees – most of them stoking fears about that elusive “magic number” that retirees will need to survive in their golden years.
So what is that number? Is it $500,000, $2.7 million … $5 million?
As a former advisor focused on retirement income planning, I can say unequivocally that there’s no “magic number” to ensure a comfortable retirement. It’s simply not a realistic approach.
Instead of getting distracted by account values and how much retirees have saved, we need to be thinking about how much income those savings will generate. And to do that we need a plan.
The Crucial Role Advisors Play
During an investor’s accumulation years (i.e., working years), do-it-yourself (DIY) investing is an option. However, when it comes to converting accumulated assets into sustainable, tax-efficient income, DIY investing just isn’t feasible. Retirement planning is just too complicated.
Therefore, it’s essential to have an experienced financial advisor with expertise in retirement income planning to help guide you through the process of building a viable retirement plan. As a former advisor, I often took on new clients who had managed their own portfolios during their working years but then realized they needed help when it came time to retire.
While it may sound obvious, you only retire once. We have to get this right the first time.
“Can I Do This?”: Three Key Questions on Retiring Comfortably
To get an accurate reading on whether or not one’s prepared to retire, it’s essential to answer three key questions: What do you need? What do you have? And Is it sustainable? Although your advisor can guide you through the process, here’s a quick overview of these key questions.
What do you need? Or more specifically, what amount of after-tax cash flow do you need? While that’s a tough one to judge 20 years out, you should be able to make a realistic estimate if you're within three to seven years of a target retirement date.
What do you have? Specifically, what do you have in terms of accumulated assets, pensions or government income streams that are going to be used to comprise the after-tax cash flow you talked about in question #1?
And finally, is it sustainable? Given what you need and what you have to create that cash flow, the third key question assesses sustainability of income. While you may not be able to answer definitively, you should have a much stronger sense of whether you’re on course to thrive in retirement – or barely make ends meet.
The ability to answer these three questions with more and more certainty will give people a far greater sense of comfort, knowing that either "Yes, I can do this" or “Maybe I’ll need to work for a few additional years.” Whatever your retirement reality may be, having a plan focused on income can provide a much more realistic picture, as opposed to picking your magic number off an article on the internet.
A Paycheque Portfolio Approach: Focused on Income
So far, and I say this without exception in the 15 years we used the strategy, if we didn't sell the investments, if we didn't move to cash, even when we're taking income from the portfolios, the account value has always recovered and ultimately exceeded the value that they were prior to the specific market downturn. The key was having a strategy that allowed us to continue to deliver the cash flow people need but, at the same time, not sell the investments that are generating that income, especially at a point in time where the investments are down in value.
When it came to building sustainable cash flow, our motto was “spend income, not capital.” The point being, you don't have to sell anything to get the paycheque you need to fund your retirement, which allows time for the investments to recover in value after they've gone down. We have seen that little miracle over and over and over and over again.
Paycheque Portfolio Approach: Pre-Retiree Case Study
The Details
Client is a single pre-retiree and former business owner who was 59 years old in 2016. He retired in 2022 at age 65.
In 2016, the value of his registered investment account was $587,505. By the end of 2022, the value was $836,544.
Key Takeaways
1) Danger Zone: Sequence of Returns
This strategy can greatly diminish the bad effects of a negative sequence of returns, which can often delay retirement for clients in traditional retirement plans focused solely on account values.
In the paycheque portfolio approach, market volatility actually benefited the client - his income distribution in 2022 went from $42,660 in 2016 to $67,488.
Markets dropped more than 6% from 2021 to 2022, but his income went up 10.6% -- All because distributions were reinvested throughout the period.
Thanks to the paycheque portfolio approach, the client can retire on schedule.
2) It’s the Income That Matters
While the account value is important, in the paycheque portfolio approach, it’s not the sole focus. We know that account values are going to fluctuate over time.
In our approach, it's more about units and the number of cents per unit – that's what's driving the income. It's not whether shares of Bank of Nova Scotia went up or down in value today. That’s not our sole concern.
The Final Word: An Ideal Strategy for Pre-Retirees
If we can get people into this strategy five or seven years before retirement, it can be extremely helpful, especially in down or volatile markets. With a paycheque portfolio approach, clients aren’t looking at their account value and panicking that they’ll never be able to retire. Instead, they’re almost gleeful that they’re getting all these extra shares thanks to the beauty of dollar-cost averaging through the reinvestment of distributions.
