Life is a marathon. In the early years, you’re growing up, hungry to learn, ready for experiences, working hard towards a greater goal in the second half of the race. As you reach the middle, though, you might begin to slow down and pace yourself more steadily, focusing on the finish line, saving for retirement, and leaving a legacy. By the time you reach the final quarter of the race, your retirement years, many individuals find themselves burning out and losing sight of their strategies. As the focus begins to shift from saving and investing to managing a retirement income, it can all start to feel even more unmanageable. This is one reason it’s important to speak with your financial advisor before retirement—this way, you can make sure there is a plan in place for balancing your retirement income.
The Importance of Strategy
Managing retirement income is a lot more nuanced than many people think. If you want your money to last throughout your retirement and have enough to pass on as an inheritance or legacy, it’s essential to have a strategy in place to ensure you don’t overspend or lose too much to taxes.
Canadians often miscalculate how much tax they will be required to pay on their retirement income and how long their retirement may be. It’s common for individuals to be laid off earlier than expected or to live longer than predicted and face the realization that their savings may not stretch as far as they had hoped. Meeting with a retirement financial advisor to discuss money management strategies can help you gain peace of mind as you prepare for retirement.
What Is The 4% Rule?
In the 1990s, studies were done to compare how much money American citizens required to support themselves during their retirement years and determine how much could be withdrawn from retirement accounts without depleting retirement portfolios too early. The result of the study claimed that the ideal amount individuals could withdraw each year from their retirement savings funds was 4%. That wisdom still permeates financial advice for pre-retirees and retirees themselves. But is there another method? Depending on your specific circumstances, you may want to consider other options. Here are four alternatives to the 4% rule that could work better for you.
Alternative Income Management Strategies
Like most financial advice, every person has a specific case that requires careful calculations and modelling. Before deciding on any strategy, your best option is to sit down with a financial planner to compare and contrast different methods to predict the results based on your circumstance.
Dynamic Systematic Withdrawals
The Concept of Dynamic Systematic Withdrawals builds on the strategy of prescheduling withdrawals from your investments and savings accounts. These payments can be scheduled monthly, quarterly, semi-annually, or annually, depending on what you prefer. The dynamic part involves rotating between investments based on a set of rules and guidelines created in advance with your financial advisor. For example, you might have a certain withdrawal minimum and maximum to account for fluctuations in the market that will affect your investments or a reaction to inflation. This strategy is better suited to individuals who can manage a fluctuating income favouring potential gains to their overall investments.
As the term suggests, bucketing is a strategy where you draw upon one source of income at a time. For example, if you have an RRSP and a TFSA, you might only withdraw from your RRSP until it is gone, then proceed to your TFSA. This approach is fairly straightforward and is suited to individuals who have a low tolerance for risk and several pools of income to choose from.
Following a life-cycle finance approach to retirement income is a method that relies heavily on an individual’s unique situation. The first step is to create a three-column list of needs, wants, and wishes for your retirement lifestyle. Then, with help from your retirement planning advisor, you determine the amount of money you’ll need to save to support each of these columns, according to the items you listed. You’ll then need to create a plan for how much money you’ll withdraw from each of your accounts to sustain all your needs. Then, your extra funds will cover your wants and wishes.
The mixed approach is a suitable strategy for all types of retirees. This strategy involves withdrawing a portion of your income from different sources regularly. For example, you might draw a little bit from your RRSP or RRIF, then withdraw a little from your TFSA, and so forth. The goal is not to avoid paying taxes altogether but to gradually pay some so you and your family can avoid a large tax bill later.
Find a Plan That Works for You
The most important thing to remember is that you’re planning your financial future. What worked best for your close friend or sibling may not be the right strategy for you or your family. Running the numbers and modelling strategic scenarios with a financial planner can help you select the right course of action for you.
Wealth Management Advisors in Edmonton
At Regan Schiller & Associates, our approach is to tailor a savings and investment plan for your life. We provide a comprehensive plan that sees you through your retirement years and handles any difficulties or unexpected challenges with ease. Book an appointment with us to start planning your retirement income strategy.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Regan Schiller is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.