If you’ve landed on this page today, you’re already aware that any retirement income planning truly starts with you.
You are ultimately the one that must decide how your retirement will look and feel like.
It will take some thought.
It will take some planning on your part.
It may even take some changes.
But on this section of our site, however, it is our goal to help you with your retirement planning by sharing various tools, delivering profiles and case studies, and more!
The Sequence of Returns Risk is Very Real
Whether you decide to retire at age 40, 50, 59, 66 or even later, the early years of your retirement income planning are going to be paramount due to the sequence of returns risk.
We’ll explain much more about that in future posts, including sequence of returns risks, but for today’s installment we simply want to impart the following words of wisdom:
Timing is everything in life. That means, early in your retirement years if the market declines significantly as does your portfolio value, that can have a huge impact on how long your nest egg might last.
Once an investor retires and starts potentially drawing down their investment portfolio, annual market returns become critically important. Significant losses in the early years of retirement (5-10 years) can dramatically reduce the longevity of a portfolio, even if great market returns occur in later years.
Consider the following table with hypothetical return values below.
| Retirement Year | Scenario A | Scenario B |
| 1 | -11.1% | 9.2% |
| 2 | 17.5% | 7.4% |
| 3 | 6% | 3.6% |
| 4 | -11.6% | 1.4% |
| 5 | 19.1% | 10.9% |
| Average | 4% | 6.5% |
Which scenario would you prefer?
We would guess scenario B. The average returns are better and are all positive!
Hardly anyone would want to live through A compared to scenario B.
While scenario B could happen in the future, we’ll tell you scenario A actually happened. Recently. It was 2015-2019 for our S&P TSX index here in Canada.
And for the record, the calendar year ending 2020 wasn’t much better if we continued the scenario A table. The S&P TSX index after 2019 in scenario A returned just over 2% in 2020.
So, right out the gate in retirement in 2015, with a fictional $1,000,000 starting portfolio value, you would be under $900,000 after your first year alone (after losing 11.1% of your portfolio value if invested in the index).
Ouch.
Again, we’ll have more (much more) on the sequence of returns risk in future retirement articles but our key point for this post is that a poor sequence of returns risk is very real and it must be accounted for in any retirement income planning.
Setting your Retirement Income Target
The closer you get to any actual semi-retirement or full-on retirement date, the more specifically you will be able to define the amount of income you’ll need.
There are considerations we’ll cover on our site when it comes to asset preservation to explore, tax efficiency, inflation-protection and more. But we believe unless you are keeping a very detailed record of your cash flow and various expenses, you will be unable to figure it out.
While retirement nest egg generalizations such as “you need 70% of your pre-retirement income” or “you need x25 times your annual spending” may be fine, they don’t replace any cash flow money management principles as you approach retirement or stay within retirement.
You’ll need cash flow management principles down pat to ensure you’re confident that you can develop some sustainable retirement portfolio withdrawals over time. These are necessary skills since your retirement income stream might need to last well into your 80s or 90s depending upon any longevity risk.
Questions such as “will I have enough income in retirement?” and “will I have enough assets to draw down?” are constantly bantered about when it comes to retirement income planning.
Our site will show you via tools, case studies and more how you can create your own retirement income plan and manage your portfolio with confidence.
We’re designing this section of the site because that’s how we intend to manage our own assets!
Retirement Income Planning Helps Navigate an Unknown Future
The commencement of retirement will involve charting some very unclear waters. Our crystal ball when it comes to our own financial futures is always very cloudy.
However we have learned a number of important financial principles we will pass along to you on this site.
We will help identify that too much retirement income, depending on your spending goals and estate plans of course, may be fraught with tax efficiency issues.
Too little retirement income will mean your basic needs and some wants will be in jeopardy.
Tailoring your retirement income plan will be personal, and this site will be designed to show you how.
Thanks for the informative article. It is written in such a format that anyone can understand. Sometimes the information given is difficult to understand or even way over my head that I get confused. You have been able to explain in simple terms what your message was all about and still reach your readers. Some of us are just starting to learn about investing and how it works. Love the fact that it was easy to understand.
Wow, great to hear Louis!
What other questions might you have for us when it comes to retirement income planning? Happy to write more content and help others.
CAP
Thanks for starting the blog. There is generally not enough Canadian content about this topic area. My husband has already semi retired and I am a few years out from retirement. We will have about 65% of our income needs from various defined benefit pensions and are trying to figure out whether to push out taking CPP and OAS until 70 which would require us to use all of our RRSP savings between retirement and age 70. Our taxes would be lower before collecting government pensions that ultimately provide the other 35% of our needs at age 70. The alternative would be take our government pensions a bit earlier with a more blended approach to generating income as we spread out our use of RRSP’s over a longer period. What approach provides less risk and more flexibility?
Thanks Lilianne for the kind words.
We look forward to posting some case studies and more!
Those are some great questions and seems well thought out. Ping us in our email inbox and we’re happy to add you to the list of future projections if you want to be a part of those!
CAP
I would assume retirees of the past held more fixed term, GIC, bond and dividend type assets. Is there any relevant analysis of average returns in possibly say the last 5 yr period? I’m assuming we have more informed retirees now holding ETF’s and dropping out GIC’s and bonds in return for them and having better performing holdings. Is the old rule of 4% returns still even relevant? More and more sites speak to portfolios holding as much as a 50% allocation of equities as being a better retirement vehicle. Are they therefore more subseptible to a sequence of returns risk or based on a buy and hold strategy with a greater mix of equities do you think they mitigate away some of that risk.
Lol, just created a Twitter account so I can follow. To me it’s a little cluttered but maybe it’ll just take a little longer for my old brain to navigate the platform
These are some great questions and topics Jeff, thanks! We will dig into these questions in the coming posts/articles.