Planning for retirement can be particularly challenging during periods of economic uncertainty. Are there ways to help reduce the demands on a portfolio during more difficult times?
Those who have just retired, or are planning to retire in the near term, may experience added pressure on investment accounts. Withdrawals from these accounts when portfolio values are temporarily depressed may deplete an account faster than anticipated. Those entering retirement earlier than expected due to job loss may face compounding challenges associated with underfunded investment accounts and an extended retirement time horizon. Beyond these challenges, we are all facing historically high inflation, which may require higher account withdrawals than previously expected.
Two areas deserve attention during these times: i) The value of a financial plan; and ii) Reducing demands on portfolios where possible. Having a financial plan can provide a clearer picture of how these changes may impact your current and future financial position. Our clients often find that it may provide comfort during difficult times. For some, it may prompt shorter-term adjustments, such as temporarily delaying retirement or re-evaluating spending habits.
While it’s never easy to see portfolio values under pressure, during periods of downward volatility we shouldn’t forget that the markets will eventually resume their upward climb. This is why it’s important to leave funds within a portfolio where possible to allow values to recover. There may be strategies that can help reduce demands on a portfolio. In brief, here are some thoughts, noting that individual situations vary depending on factors such as income sources, taxation rates, lifestyle considerations and more:
Evaluate your liquid inflows — Having an understanding of your liquid assets is important, including income you receive through government benefits and employer pensions, as this may be sufficient to meet your living expenses. For many, delaying government benefits like the Canada Pension Plan (CPP) makes good financial sense, especially for those who have longevity on their side. However, some may need these benefits to supplement income. Others may pick up part-time work to generate income, shorten a retirement time horizon and increase a retirement portfolio by allowing a longer period of compounding for existing funds or through additional contributions.
Evaluate your spending — Due to inflation, money doesn’t go as far as it used to, especially for essential goods like food and gas. A budget may identify opportunities to reduce non-essential expenses, potentially reducing income needs. While a general rule of thumb used in the investing industry has been a four percent withdrawal rate for retirement income, at the onset of retirement this may be high. Spending can change dramatically over a retirement life cycle and depends on many factors. A budget can help to provide a clearer picture of income needed at any particular time.
Consider the sources of withdrawal and the impact on taxes — Withdrawing from investment accounts has the potential to trigger taxes. In addition to required withdrawals from a Registered Retirement Income Fund, this may put you in a higher marginal tax bracket. As such, you may consider withdrawing from non-taxable sources, such as the Tax-Free Savings Account. If you are turning to taxable assets, it may be beneficial to take advantage of tax-loss selling, as 50 percent of a capital loss can be used to offset taxable capital gains. Or, there may be benefit in selling assets with the highest cost basis first, then moving to assets where the cost basis is lower to reduce a potential tax hit. This isn’t always the best choice, especially when considering lifetime tax optimization; if you expect to be in a higher marginal tax rate in future years, this may impact your decision.
Consider your asset allocation and the differing tax rates on types of income — When producing retirement income from a non-registered portfolio, it is important to recognize the differing income tax rates on interest, capital gains and dividends. Fixed-income investments like guaranteed investment certificates (GICs) are taxed at higher marginal rates compared to capital gains and Canadian eligible dividends. A non-registered portfolio weighted toward income that generates primarily eligible dividends and capital gains will generally produce a higher after-tax income compared to a portfolio more heavily weighted toward fixed-income products.
As always, we are here to provide support. If you require assistance with this or other investing matters, please don’t hesitate to reach out to your Echelon advisory team.
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Disclaimers
Echelon Wealth Partners Inc.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them.
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