What happens to your RRSP when you retire?
Prior to retirement, people maximize their contributions to their RRSPs, top up their children's RESPs and put whatever is left over into their TFSAs and non-registered accounts.
Once they hit retirement, the mystery about investing their savings to draw an income while unravelling these plans begins, and the biggest concern they face becomes not outliving their money.
There has been a great deal of research into investing for retired seniors, and with average life expectancy continually increasing, the rules of thumb regarding investment withdrawal rates will face demanding stress tests as fixed-income rates of return dwell at historic low levels.
This is because of the conservative approach investment advisers tend to take when working with retired investors' savings. A conservative portfolio will typically see a concentration of 60% or more of fixed income.
There are those who believe that in order to not run out of money in retirement, your withdrawal rate on your portfolio should not exceed 4% or 5%. While this might be a good rule of thumb, it assumes that your retirement income will be a constant, or even linear, amount. About 4% or 5% might be a good place to start by providing a base income -- and let's face it, it makes the math easier -- but I don't think it is realistic to expect that someone in their 90s will incur the same expenditures as they did in their late 60s or early 70s.
It is a common belief that you will spend more on an annual basis in the first 10 years of your retirement than you will in the last stages of your retirement. This is not to discount the high costs of assisted living or medical expenses you may incur in late retirement, but to recognize the desire to fulfil lifelong dreams of travel and recreational activities while you are young enough and healthy enough to enjoy them.
Rather than a linear rate of return, you might wish to consider a retirement investment portfolio that will deliver the necessary amount of income to match the different stages of the retirement you envision.
You may want to travel the world, golf all over North America, or just sit on your porch and carve wooden ducks. Your expected activities in retirement will dictate the amount of income your portfolio needs to deliver at different stages, and this can be planned well in advance. If you put a price or a cost on each of those activities for defined periods of time, you can then determine just how hard your money needs to work.
Understanding these parameters will help you and your adviser invest your portfolio during retirement in a manner that is most suitable for you, so you do not outlive your money.
Doug Riding BA, CFP, FMA
Senior Investment Adviser with IPC Securities Corporation Ridingteam.ca