In this installment, we're going to talk about the benefits of a Retirement Income Plan. The developmenr and maintenance of an income plan is a key compmoment for setting you up for a great retirement. Over the next few weeks, we are releasing videos reviewing each of the benefit areas of the retirement income plan.
If you're beginning to think about retirement, you're five to 10 years out, and you're wondering whether you should get a structured plan in place, you will benefit from this series of blogs. Today we'll talk about one of the first benefits.
Benefit One - What is the rate of return I need on my portfolio?
As we begin to develop a customized retirement income plan for our clients, we'll take a number of factors into account.
There may be pension plans at work, retained earnings in a business that might be used to supplement income when they retire. As well, there will be government pensions and personal savings (RRSP's, TFSA's and non-registered accounts).
When it comes to their investment portfolio, one of the main items that clients want to be clear about is the rate of return they require on their portfolio? Clients want to make sure they are managing their portfolio mix in line with their plan so they can fund their retirement dreams.
There are two main phases to the calculations that will help you arrive at the rate of return requirements.
Phase one of the calculation is the green line sloping up (see the first image), During this time, you are adding money to your portfolio. You're investing money and you're accumulating financial assets that will eventually be a supplement to your retirement cash flow.
And then retirement happens (orange downward sloping image). It's not usually a toggle switch where you just retire- full stop. Increasingly you're seeing people transition into retirement, Before full retirement happens, we often see some part-time work continuing; but at an abbreviated rate.
As you transition into retirement, you begin to move into the de-accumulation phase of your retirement portfolio. Some people don't want to see the sloping line going down. They want to hold it constant because they want to pass on legacy assets. They want to have estate value for that purpose.
Assets for legacy planning may be important, but for some families, there may be a negative ripple effect on what level of after tax income is sustainable and if it's sufficient to look after lifestyle requirements.
As you get close to retirement, you need to be tactical. You may still have growth assets, but now you're thinking about income. The de-accumulation stage can be very challenging. During the de-accumulation phase, you're trying to emphasize capital preservation, investment income to supplement other sources of pensions, and you want to get a competitive return.
As we begin to develop the game plan around what return do you need during the accumulation phase and the return profile for the de-accumulation phase, our mantra is, "Don't take on more financial risk than is necessary to achieve your goals, but you need to take on enough risk."
In summary, when we complete a retirement income plan, that incorporates the accumulation phase and the de-accumulation phase, we can begin to model cash flows and this will provide guidance on required investment returns.
For example, let's assume that our financial modelling confirms that you need an average return of 5% per year. Let's work through the logic of how to design a portfolio that has a high probability of delivering this return.
Risk-Free Return - The risk-free return is the return you can obtain by investing in investments like; GIC's, money market funds, high yield savings and T-Bills. This is the return that requires no assistance from an investment professional. Here's the problem with risk-free investments. After taking into account inflation, your real return will be zero!
Let's assume that you can obtain a risk-free return of 2%. If inflation is averaging 2%, your after-inflation return is zero!
In our example, the client needs a return of 5% per year. This is an additional return of 3%. We refer to this additional return as the managed account premium. This is the net of cost return that you or your retirement income planning advisor needs to achieve, so you can fund your retirement income goals
Once you know the managed account premium, you are in a position to know the mix of cash, bonds, stocks and real estate that you need in your portfolio to obtain a managed account premium of 3% for a total return of 5%.
It's our hope that you have found this content helpful.
Are you looking for resources that will help you in your retirement journey?
We have put together a Retirement Planning Resource Bundle (Videos and pdf worksheets) that will help you to avoid the retirement planning pitfalls. As well, we include our Retirement Planning Tips Sheet and Checklist.
Here's the link to the Retirement Planning Resource Bundle,
If you want a customized Retirement Income Plan, click the following link to get more information and how to get your plan,
Click the following link to start a conversation,