For most of your working life, the retirement conversation is straightforward: save more, invest wisely, and watch the number grow. Once you retire, however, the equation changes entirely. The question is no longer how much you can accumulate, but how long it will last, and that turns out to be a considerably harder problem. How you draw the money down, which accounts you pull from first, and what the markets happen to be doing in your first few years of retirement can matter just as much as how well you saved in the first place.
This is what financial planners call the decumulation phase, and it is at the heart of what we cover with Tradex members. If any of this resonates, don’t work through it alone. Sit down with us for a free portfolio review and a personalized retirement income projection, so you can see exactly how these ideas apply to your own numbers. More on that shortly.
Asset allocation still does most of the work
It is tempting to think that picking the right investment or timing the market is what separates a comfortable retirement from a stressful one. In practice, the split between equities, fixed income, and other asset classes tends to matter more than almost anything else. It is a balancing act between long-term growth and short-term stability, and where you land on that spectrum should generally track your time horizon, risk capacity, and tolerance: the more years you have ahead of you, the more room there is for equities in the mix.
It is tempting to think that picking the right investment or timing the market is what separates a comfortable retirement from a stressful one. In practice, the split between equities, fixed income, and other asset classes tends to matter more than almost anything else. It is a balancing act between long-term growth and short-term stability, and where you land on that spectrum should generally track your time horizon, risk capacity, and tolerance: the more years you have ahead of you, the more room there is for equities in the mix.
Spreading your wealth across asset classes is key. Looking back over rolling twenty-year periods, no single asset class holds the top spot consistently; today's winner is often tomorrow's laggard. That unpredictability is exactly why diversification tends to smooth out the ride, and it is one of the first things we examine when we sit down with a member for a portfolio review.
Where you hold it matters too
Tax location is the quieter cousin of asset allocation, and it is easy to overlook. RRIF minimum withdrawals, for instance, are neither optional nor flat. They are set by legislation and climb steadily with age, starting at 5.24% at seventy-two and eventually reaching a flat 20% once you turn ninety-five. Since every dollar withdrawn counts as taxable income, the order in which you draw from your RRSP or RRIF, your TFSA, and any non-registered accounts can shift your lifetime tax bill in a meaningful way. It is the kind of detail that rarely gets attention until it is too late to plan around, which is exactly why we build it into every retirement income projection we prepare for members.
Tax location is the quieter cousin of asset allocation, and it is easy to overlook. RRIF minimum withdrawals, for instance, are neither optional nor flat. They are set by legislation and climb steadily with age, starting at 5.24% at seventy-two and eventually reaching a flat 20% once you turn ninety-five. Since every dollar withdrawn counts as taxable income, the order in which you draw from your RRSP or RRIF, your TFSA, and any non-registered accounts can shift your lifetime tax bill in a meaningful way. It is the kind of detail that rarely gets attention until it is too late to plan around, which is exactly why we build it into every retirement income projection we prepare for members.
The risk nobody warns you about: sequence of returns
Here is a risk that catches many retirees off guard. During your working years, the order in which good and bad market years arrive does not matter much; only the average return over time counts. The moment you begin withdrawing from your portfolio; however, the order suddenly matters a great deal. Negative investment returns in your first year or two of retirement can do lasting damage that a strong average return years later cannot undo.
Here is a risk that catches many retirees off guard. During your working years, the order in which good and bad market years arrive does not matter much; only the average return over time counts. The moment you begin withdrawing from your portfolio; however, the order suddenly matters a great deal. Negative investment returns in your first year or two of retirement can do lasting damage that a strong average return years later cannot undo.
Consider two retirees, each starting with $100,000 and withdrawing $7,000 a year. They experience the exact same set of annual returns over fifteen years, just in a different order. One ends up with a portfolio still worth over $75,000, having withdrawn $105,000 along the way. The other runs out of money entirely by year eleven, despite withdrawing less overall. Same average return, wildly different outcomes, all because of when the bad years happened to land.
What you can actually do about it
The good news is that sequence of returns risk is not something you simply have to hope to avoid. A cash wedge, setting aside one to three years’ worth of planned withdrawals in stable, guaranteed short-term investments, means a market downturn does not force you to sell depressed assets just to cover living expenses. Leaning more heavily on pension income in weaker years, keeping a portion of the portfolio in lower volatility holdings, and building a budget with clear discretionary and non-discretionary lines, including a contingency fund for the
inevitable surprise expense, all help as well.
The good news is that sequence of returns risk is not something you simply have to hope to avoid. A cash wedge, setting aside one to three years’ worth of planned withdrawals in stable, guaranteed short-term investments, means a market downturn does not force you to sell depressed assets just to cover living expenses. Leaning more heavily on pension income in weaker years, keeping a portion of the portfolio in lower volatility holdings, and building a budget with clear discretionary and non-discretionary lines, including a contingency fund for the
inevitable surprise expense, all help as well.
There is also a softer strategy worth mentioning: retiring slowly. Many retirees find they have more free time, and spend more money, in the first few years after leaving work. Taking on a part-time role, even something modest, can ease the withdrawal rate in those early years and sometimes comes with the added benefit of lower cost insurance.
And when markets do turn, history is on the side of patience. Looking at U.S. bull and bear markets going back to 1958, the average bear market has recovered to its previous peak in about a year and a half. Investors who stuck to a cash wedge or a flexible budget, rather than selling into the downturn, have generally come out ahead for having waited it out.
What could your retirement actually look like?
All of this is easier to discuss in the abstract than it is to apply to your own life, which is really the point of a personalized retirement income projection. We take your pension benefits, CPP and OAS, your RRSP/RRIF, TFSA, and other savings, and factor in things like a potential house sale, an expected inheritance, income splitting with a spouse, survivor benefits, and any legacy goals you have in mind. What filters through is a clear picture of what your retirement income could realistically look like, year by year.
All of this is easier to discuss in the abstract than it is to apply to your own life, which is really the point of a personalized retirement income projection. We take your pension benefits, CPP and OAS, your RRSP/RRIF, TFSA, and other savings, and factor in things like a potential house sale, an expected inheritance, income splitting with a spouse, survivor benefits, and any legacy goals you have in mind. What filters through is a clear picture of what your retirement income could realistically look like, year by year.
Let's take a look at your numbers
If you would like a free personalized portfolio review, along with a retirement income forecast built around your specific situation, visit tradex.ca or email advice@tradex.ca. There is no cost and no obligation, just a clearer picture of where you stand and what your options are. We are here to help.
If you would like a free personalized portfolio review, along with a retirement income forecast built around your specific situation, visit tradex.ca or email advice@tradex.ca. There is no cost and no obligation, just a clearer picture of where you stand and what your options are. We are here to help.
Tradex Management Inc. (613) 233-3394 | advice@tradex.ca | www.tradex.ca 1604 – 340 Albert St, Ottawa ON, K1R 7Y6
This information is provided by Tradex Management Inc. for informational purposes only and does not constitute legal, accounting, tax, investment, or financial advice. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the prospectus before investing.