Retired ($40,000/Year Income): Investment Income Portfolio - Ren's Assessment


Ren

Ren's concern is to make sure he doesn't drain his portfolio too fast. Let's see how he's making out.

  • Sources of income:
  1. Government pensions: $20,000/year
  2. Investment portfolio withdrawals: $20,000/year
  • Portfolio composition: $400,000 invested in cash-on-hand and a low-cost, self-built portfolio of funds and stocks.

Asset Mix

Cash: 10%

Fixed Income: 30%

Equities: 50%

Alternatives: 10%

Core Assets

Term Deposits and Money Market funds

Government Bonds

Canada, U.S. and International Equities

Real Estate: Real Estate Investment Trust (REIT)

Income Enhancer Strategies

Limit cash to 2-3 years of expenses


Low or no-cost to own

Add corporate, high-yield or emerging market bonds
 

Hold equities with a strong record of ongoing and rising dividend payments

Infrastructure (certain pre-built portfolio funds may include an allocation)

Portfolio Sustainability Assessment

  • Monitor your retirement plan’s sustainability; track your spending:
    • Modify spending and/or the annual portfolio payout if the withdrawal rate is depleting the portfolio too fast.
  • Protect your portfolio from a sudden market downturn; set aside sufficient cash to cover two to three years of expenses.
  • Avoid:
    • Surplus income being withdrawn and held as cash.
    • Large withdrawals that increase your income and put you into a higher tax bracket; spread a large withdrawal over two or more years.

To-Dos

1. Check for suitability:

  • Think long term. Continue to hold some equities. Avoid a too-safe portfolio that won’t generate a positive, after-inflation return.
  • Monitor your ability and desire to self-manage the portfolio. If a mental health change occurs, consider hiring a professional money manager.

2. Assess retirement income adequacy:

  • Have living expenses increased or decreased?
  • Are large expenses anticipated over the next year? Five years?
  • Is the portfolio generating sufficient income?
  • Can the current withdrawal rate be maintained?

3. Monitor, report and evaluate portfolio parameters:

  • Check that the actual asset mix aligns with your target asset mix.
  • Track what makes up the income payout. How much is from interest and dividends versus capital drawdown (selling assets)? How does the split vary in a “good” versus “poor” year for investments?
  • Fees, fees, fees; avoid, reduce and seek out discounts.
  • Are income payouts from registered and non-registered accounts adjusted to be tax-efficient?

4.     Identify required changes and implement portfolio adjustments:

  • Is the target asset mix at its final destination or is reallocation still required?
  • Rebalance at least annually or when a significant event occurs; consider funds with automatic rebalancing when payouts are made throughout the year.
  • Maximize use of TFSAs:
    • Use as a source of tax-free money (for example, if a large portfolio withdrawal is needed to buy a car).
    • Make top-up contributions with surplus income withdrawn from life income funds (LIFs) and registered retirement income funds (RRIFs).

Manage Your Portfolio

  • Continue to monitor, evaluate and adjust your portfolio during retirement.
  • Use the tips and to-dos from Jim and Brenda's Annual Review as a road map to follow when managing a portfolio built with multiple funds or types of assets.

To review Ren's story, see Retired: $40,000/Year Income - Ren's Story.