Retired: $40,000/Year Income - Ren's Story


Ren

Sources of income:

  1. Government pensions: $20,000/year
  2. Investment portfolio withdrawals: $20,000/year

Investment portfolio: $ 400,000 invested in conservative-balanced funds and term deposits.

Problem

  • Ren is withdrawing 5% ($20,000) of the portfolio’s value annually.
  • His current rate of investment return is less than 5%.
  • His fees are high, his equity component is low and the $20,000/year is draining the portfolio fairly quickly.
  • To generate a sustainable long-term income, Ren should try to reduce his fees, increase his equity allocation and/or ideally reduce the withdrawal rate to 4% ($16,000).

Ren's Ace-in-the-Hole

While he agrees the investments could be better managed, he plans to keep on withdrawing at least $20,000/year from his investments. He’s done the math and figures if he lives longer than he expects, there’s enough equity in his home to cover his expenses for another 20 years.

Strategy

Portfolio builder: Low-cost, retirement income funds (for example, income and growth and/or monthly income funds).

Why?

  • Highly diversified across asset classes and geographic regions.
  • Balances preservation of capital with generating income and growth.
  • Prioritizes achieving long-term returns that beat inflation, to preserve a retiree’s buying power.
  • May hold some cash for protection during market downturns.
  • Fee discounts for larger investments.
  • Designed for retirees, the funds pay out the investment income and are more tax efficient.
  • No day-to-day monitoring is required:
    • Funds are automatically rebalanced.

Tips

  • Seek out funds with rebates for owning long term (for example, more than five years).
  • Keep fund fees low. Consider passively managed (index) funds, exchange-traded funds (ETFs) or institutional funds with reduced fees.
  • At departure, accounts in your employer’s plans may be transferred into a group plan available through the plan administrator (for example, Sun Life or Morneau):
    • A wide choice of low-cost investment funds and ETFs are available, including funds designed to generate retirement income.
  • Monthly income funds may have withdrawal rates higher than average investment returns. Select funds with sustainable withdrawal rates (for example, no more than 4% to start, rising over time) when anticipating a payout timeline of up to 30 years.

Avoid buying units in funds with back-end loads or deferred sales charges, which charge fees in registered accounts that may require you to make annual withdrawals. If you sell any units too soon, the fund company will charge you a redemption fee.

To see tips and recommendations for Ren after his annual portfolio assessment, go to Retired ($40,000/Year Income): Investment Income Portfolio - Ren's Assessment.