Generating Cash Flow in Retirement
One of the greatest fears for retirees is outliving their financial assets, a risk known as “longevity risk”. Proper pre-retirement planning and optimizing cash flow strategies will greatly reduce this anxiety and provide for a more secure retirement.
Cash Flow Planning
Ideally, you would have been working with a financial professional to have a fully comprehensive financial plan in place that would include retirement planning.
Together, you will be able to establish your retirement cash flow needs (income relative to expenses) and which of the following cash flow sources are available and most efficient for your personal circumstances.
Workplace Pension Plan
Many retirees today still have the benefit of having worked for an employer that provided a defined benefit pension plan. Many of these plans pay up to 80% of your employment income annually.
If instead you participated in a Defined Contribution Pension Plan or a Group RRSP, you can transfer these assets to an investment manager of your choice for continued growth or, if need be, you can convert them to an annuity to provide regular cash flow.
CPP and OAS
As a retiree in Canada, you are eligible to receive monthly government benefits in the form of payments from the Canada Pension Plan (CPP) and the Old Age Security (OAS) pension. The amounts are determined by your employment history and the date when you initiate receipt of payments.
RRSPs and TFSAs
With proper pre-retirement planning, you should have maximized your Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA) contributions for tax-free investment growth until your retirement. Post-retirement, you can draw regular cash flow payments from these accounts, with the payments now being taxable.
Drawing From Your Investment Portfolio
If it is necessary to draw on your (non-RRSP, TFSA) investment portfolio for some of your cash flow needs, there are two recommended methods.
The bucket approach divides your portfolio into two “buckets”: a safe bucket for day-to-day needs which holds cash and short-term bonds; and a riskier bucket for longer-term needs which will have a higher allocation to equities.
Alternatively, your investment portfolio would be invested in dividend-paying stocks, where the regular dividend payments could be used for short-term cash flow needs while the underlying stocks are left to appreciate for your longer-term needs.
Using Home Equity
There are several ways to access the equity you have built up in your home on retirement.
You may wish to downsize to a smaller residence in which case you could put any resulting profit into your investment portfolio.
You could obtain a home equity loan, but this would add to your long-term debt.
Lastly, you could obtain a reverse mortgage which would provide you with regular payments for a set period, but you would no longer own your home.
A growing number of retirees are returning to the workforce whether they need the extra cash flow to make ends meet or to work at something they enjoy part-time – for instance, turning a hobby into a job.
What’s Best for You?
Entering retirement after decades of employment is a life-altering event, but it doesn’t have to be accompanied by added anxiety in the form of financial uncertainty. Working with a trusted financial professional will ensure that you know your financial position, understand your cash flow needs, and how to best fulfill them.
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Established in 1985, Bloom Investment Counsel Inc. is a Toronto-based independent investment management firm that specializes in creating and actively managing diversified, customized portfolios of Canadian and U.S. dividend-paying stocks for high-net-worth individuals and families, family offices, foundations, corporations, institutions, and trusts.
Our customized dividend-paying investment portfolios can help you generate an additional stream of income for easy cash flow during retirement, if desired, while continuing to preserve and build wealth.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.