Ian answers: Congratulations on your retirement! I hope you are enjoying it.
There are no easy answers. It is often easier to suggest ways to save enough for a retirement fund than to figure out how to organise that fund to last the rest of your life – let alone the life of a partner, if you have one. As pension specialists might say, accumulation is easier than decumulation or converting accumulated pension savings into retirement income.
General answers don’t necessarily address an individual’s circumstances and personality, and experts can disagree about the best approach.
Three keys to action
Nevertheless, there are three things you should definitely do: make a budget, review that budget regularly, and avoid unnecessary risk. Ideally, you’ll want to set up your finances so your retirement fund and any state pension you expect to get will cover this budget.
If there’s anything left after that, consider a global tracker fund that has about 60% in global equities and 40% in global bonds. This can essentially be your safety fund.
We’re all individuals
I know nothing of your personal situation. How much money you have, the lifestyle you want, the financial commitments you have, or whether you or any dependents have health issues can all make a difference. I don’t know if you are a worrier or carefree.
I also know little about Canadian tax rules. They may favour particular ways of investing or drawing income from your fund. It can be a good idea to get specialist advice on your particular needs and desires.
Live long and prosper?
However, we can assume many more years of retirement ahead. A 65-year-old in Canada is expected to live another 18 years if male, and 21 years if female. Then again, you may live much longer. Among pensions specialists, this is known as longevity risk.
If you worked for 40 to 45 years, you could be without a regular income for about half the number of years you were working. No matter how you spin it, it’s a long time to be without a salary. This is why it can make sense to avoid unnecessary risks.
Show me the money
Some recommend taking dividends from an equity portfolio or coupon payments from bond portfolios. Others suggest taking a small amount from the portfolio over many years until the portfolio is exhausted – for example, following the four percent rule.
Depending on your appetite for financial risk and amount of money you have available, these approaches may work for you. The trouble is there’s still no guarantee the money will last as long as you and any dependants might need it.
The only guarantee might come with an annuity-type arrangement that pays out a certain sum each year until you die. Some arrangements may even offer cover until your partner dies. You can get a similar effect using index-linked bonds if you are prepared to invest for 20 years or so.
The price of certainty
Low interest rates can reduce the appeal of annuities and index-linked bonds. But that ignores the value of having secured a lifetime income. This is partly why many people place a high value on defined-benefit pension schemes over pension schemes where people accumulate funds individually.
But think of it this way: you have probably benefited from low interest rates while you were building up your pension fund. Low interest rates typically lead to higher asset prices (such as for shares, property or bonds) in a retirement fund.
When a person retires and accesses the portfolio, he or she has already benefited from the lower rates. If interest rates were higher, the asset prices would be lower but annuities would pay more. If you think of it that way, focusing on the size of your retirement fund can mislead you.
And remember that luck has probably played an important role in generating your pension pot.
Put your plans in place
Make plans now that you will be happy to leave in place for a long time; some research suggests that not only are people more risk-averse with age but they are more biased towards the present. So it is definitely smart to take action on your future finances, now rather than later. Good luck!