Your retirement income is built for the long term, but market volatility can create a lot of doubt. Having a good financial strategy can help ease these concerns. It can address your goals for the future and help protect you from the unexpected. Today we will provide you with helpful guidelines to manage your retirement savings and help improve your financial confidence.
Wellness in retirement involves more than just finances. It's important to focus on your physical, mental, and social health as well. True wellness is about quality of life and sense of well-being. This comes from maintaining good physical, mental, emotional, intellectual, and social wellness.
Physical wellness includes nutrition, exercise, and ability to care for oneself. It also means having a safe and accessible living environment. Mental wellness is understanding your emotions and sharing feelings in a healthy way. It involves lifelong learning and new challenges too. Social wellness means having satisfying relationships and contributing to your community.
All of these dimensions of wellness work together to improve your quality of life in retirement. Wellness is important at every stage. Focusing on it in your retirement can help you live longer and better enjoy this next phase of life.
<On the slide:> A Venn diagram showing the interconnection between three aspects of retirement planning: Wellness in the middle, with Mental, Physical and Financial overlapping it to illustrate their interrelationship. <End of slide>
One of the first steps is to think about what you see yourself doing in retirement. Your desired lifestyle has a major influence on your retirement planning. Some people want to work part-time in retirement. Others don’t. Some people want to stick close to home, while others want to travel the world. It’s essential for you to think about your needs, wants and dreams. What makes up your retirement vision? This isn’t anybody else’s retirement – it’s yours. So, what do you want it to look like?
Generating a steady stream of income once you no longer work will be one of your greatest challenges in retirement.
Most Canadians use a combination of the sources listed on this slide.
Once you've familiarized yourself with these, you’ll be able to estimate your retirement income.
<On the slide:>
TITLE: "Sources of income at retirement." The slide shows three categories of income sources presented in columns:
- "Government": Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), Old Age Security (OAS)/Guaranteed Income Supplement (GIS), Allowance
- "Primary": Company retirement program, Personal Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA)
- "Secondary": Home, Rental property, Other savings
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What do we mean when we say personal savings? There are a variety of different ways to save. While there are more plan types than shown on this slide, these are the most common. Some plans you may recognize such as Tax-Free Savings Accounts or Registered Retirement Savings Plans. These are commonly referred to as TFSAs and RRSPs. RRIF and LIF refer to Registered Retirement Income Fund and Life Income Fund. And “open” or non-registered accounts round out the typical list of accounts. The key difference between these accounts is taxation.
Withdrawals from a TFSA are tax-free. In contrast, every dollar withdrawn from an RRSP, RRIF or LIF is taxable income.
A non-registered account is often used when one has reached their annual contribution limit on registered plans. It’s not a tax-sheltered account. Any investment income, such as interest and dividends, are taxable each year. Withdrawals may also result in a capital gain or loss, which is taxable in the year of withdrawal.
Because of the tax differences, you may want to assign different accounts for major purchases. For example, a new car or replacing the roof on your house. This will help ensure you aren’t creating a large tax bill for yourself in years you’re making major purchases.
Where you draw your income from will depend on your age, marital status and your sources of income. Depending on your tax situation, you may even want to draw from taxable sources earlier. Working with an advisor can help you to build a tax-efficient plan.
Here are 4 common risks often discussed when talking about retirement.
First – longevity. Or the risk of outliving your savings.
Inflation will erode what you can buy with each dollar – meaning as time goes on, you will be able to purchase less.
And what about the markets? What happens if there’s a big drop while you’re retired? Regular investment reviews will be part of a fluid retirement plan to mitigate market dips during this time when you are also withdrawing retirement income.
And a good retirement plan anticipates the unexpected – whether that be unexpected expenses, changes in health, or the early death of a spouse. Saving for a rainy day, having a budget, and products such as Life insurance, Critical Illness insurance and/or Long-term care coverage are all potential components of security planning and are important topics to explore.
Clearly there are many things to consider when planning for retirement.
Canadians are living longer than previous generations. We all know this. But we aren’t planning for it. Estimates indicate that people underestimate the number of years they are going to live by five years. Imagine five years without income. Now layer that with the fact that it’s likely to occur at a time of additional health care and housing costs.
According to our Sun Life Barometer study (conducted in 2017) it was found, on average, Canadians say they expect to retire around age 64 (the exact average is 63.66). If we think of that in context of life expectancy, we clearly need to be saving to cover a long time in retirement.
<On the slide:>
4 sets of icons. Each set depicts an age 65 male and female, sex assigned at birth and shows the probability of living to a particular age.
Female has a 76% probability of living to age 80. Male has a 65% probability.
Female has a 59% probability of living to age 85. Male has a 45% probability.Female has a 38% probability of living to age 90. Male has a 24% probability.
Female has a 17% probability of living to age 95. Male has a 9% probability.
Source: The Canadian Pensioners’ Mortality Table published by the Canadian Institute of Actuaries, 2014. Based on assigned sex at birth.
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Government health insurance doesn’t cover all the health-care costs you’re likely to run into at some point in your life. To protect your income and savings from health costs, there are various types of health insurance available.
Each type of health coverage offers different protection for the various stages of your life. During your working years, it’s important to focus on protecting your family income. As you move toward retirement, it becomes more important to protect the financial resources that you have worked so hard to build.
<On the slide:> A chart that has a time-line from age 25 to 95 on the bottom. You’ll have basic living expenses every year you’re alive. Protection needs are higher when you’re younger. Health care needs are higher when you’re older. Saving needs are higher when you’re younger. Lifestyle expenses are most likely highest in the early years and are likely to decrease with age. Health expenses are likely to increase with age. Long term care insurance and legacy needs may also become important as you age. <End slide>
Market volatility is a very common discussion when it comes to planning. But it is not your enemy. You can beat it!
The truth is, wise investors see market volatility as an opportunity to buy quality investments at a discount.
To do this, many will use dollar-cost averaging to take advantage of market volatility. Dollar-cost averaging occurs when small investments are made regularly over a period of time. For example, monthly. Your money buys more units when the markets are low. When markets rise again, your whole portfolio may be worth more as a result.
<On the slide:> A chart that shows the market cycle of emotions. There is maximum financial risk at the top of the cycle when emotions are highly positive about market conditions. There is maximum financial opportunity at the bottom of the cycle, when emotions are highly negative about market conditions. <End slide>
Let’s review an example of sequence of returns. This is the order in which gains or losses happen in a portfolio. The order of returns is particularly important when you start to draw income.
When we refer to the retirement risk zone, it is the five to ten years just before and after retirement. It’s the crucial time when short-term losses can have negative long-term effects. There’s no time for your investments to recover from a loss. And this can have a major impact on how long your money will last.
These charts show how short-term volatility in the early years can have a long-term impact on your retirement savings.
We have two individuals here, Tammy and Carol, and their charts have a few things in common.
One thing that they have in common is the beginning value of their accounts. They both have a balance $250,000. They will both withdraw 5% per year, indexed by 3% inflation. Both charts show a portfolio from age 62 to 91. And they both average an annual rate of return of 7.26%.
The major difference between the two charts is that Tammy’s chart, the chart on the left, experiences negative returns early in retirement.
Carol, who has the chart on the right, has positive returns early on in retirement. She does have years of negative return, but they are near the end of the chart. So, what does this do to their account balances? Remember, they have the same average annual growth over their retirement years.
Unfortunately, Tammy runs out of money at age 80, but Carol still has a positive account balance at age 91. This shows quite clearly how negative returns early on in retirement, can have a significant impact.
So, what can we do to mitigate these risks? Let’s look now at the cash wedge strategy.
<On the slide:>
Tammy’s early market decline chart:
Beginning value: $250,000
Age 62:
- Annual return: -0.80%
- Account balance: $235,490
Age 63:
- Annual return: -10.83%
- Account balance: $197,109
Age 64:
- Annual return: -13.79%
- Account balance: $156,663
Age 79:
Annual return: 1.72%
- Account balance: $30,927
Age 80:
- Annual return: 7.76%
- Account balance: $12,047
Age 81:
- Annual return: 7.15%
- Account balance: $0
Age 89:
- Annual return: 11.68%
- Account balance: $0
Age 90:
- Annual return: 15.61%
- Account balance: $0
Age 91:
- Annual return: 16.02%
- Account balance: $0
Average annual: 7.26%
Carol’s late market decline chart:
Beginning value: $250,000
Age 62:
- Annual return: 16.02%
- Account balance: $277,550
Age 63:
- Annual return: 15.61%
- Account balance: $308,006
Age 64:
- Annual return: 11.68%
- Account balance: $330,723
Age 79:
- Annual return: 9.00%
- Account balance: $741,117
Age 80:
- Annual return: -3.38%
- Account balance: $694,809
Age 81:
- Annual return: 19.43%
- Account balance: $807,912
Age 89:
- Annual return: -13.79%
- Account balance: $836,223
Age 90:
- Annual return: -10.83%
- Account balance: $717,052
Age 91:
- Annual return: -0.08%
- Account balance: $681,830
Average annual: 7.26%
Footnote: Illustration assumes a 5% annual withdrawal indexed for 3% inflation each year. Registered accounts are subject to minimum withdrawals which may be higher than 5%. <End slide>
A cash wedge strategy can help to steady your retirement income. The goal is to allocate a portion of your portfolio to cash to help meet your current income needs. You diversify the rest of the portfolio to benefit from participating in the market.
This is how it works.
The first section we’ll look at is cash. Direct one years’ worth of income to liquid, conservative investments such as cash, or a Money Market Fund. This is the account you will draw your income from.
If we think about Tammy and Carol, they’re taking 5% of their $250,000 portfolio in income each year. 5% of $250,000 is $12,500. And that’s how much they would invest in cash if they were following the cash wedge strategy.
The second wedge is where we have fixed income. These are shorter term, conservative investments. Approximately two to three years’ worth of projected retirement income is directed here. Typically to a low volatility short-term investment such as guaranteed investment certificates (GICs), or bond funds. This provides stability and some potential room for growth. In years two and three, you roll, or withdraw from these to replenish the cash wedge. So, in Tammy and Carol’s example, we would ensure that $25-$30,000 was invested in shorter term, conservative investments.
The rest of your portfolio is invested to match your individual investment profile. We call this personalized diversification. Over time any profits are moved from this part of the portfolio into the cash wedge or fixed income portion. This will create income throughout your retirement. So, with Tammy and Carol we would direct just over $200,000 to a portfolio that matched their risk tolerance.
What are the benefits of doing this? Employing a cash wedge strategy can help you to reduce the impact of sequence of returns risk. It will increase your portfolio liquidity. And it will help ensure that your short-term income is not subject to market declines.
<On the slide:> A circle graph, with 3 sections. #1: Cash: 1 year of income. #2: Fixed income: 2-3 year of income. #3: Equities: 3+ years of income.
Additional slide content:
- Keep a portion of your portfolio in cash.
- Diversify the rest so you benefit from participating in the market.
- Perfect if you need income but are concerned about volatility.
- Reduces short-term risk and increases liquidity. <End slide>
Retirement can span many years – 25, 30, or even more. Over that time, your income needs will change. This may be due to age, health, or the death of a spouse. If you have children, grandchildren, or elderly parents, this may also increase your spending. And costs for home repairs or renovations, vehicle replacement and higher than expected inflation should all be considered.
The phases of retirement are often referred to as “Go-Go,” “Slow-Go” and “No-Go.” The exact timing of each will vary for everyone. But, most of us can expect our spending to shift from lifestyle and leisure towards health care and housing costs as we move through our retirement years.
Completing a budget that accounts for your lifetime expenses ( i.e., heat, shelter, food, etc.), as well as your discretionary expenses (such as entertainment or travel), is a key action step for defining your overall spending plan (or retirement income goal).
Categorizing expenses into needs and wants may assist you in making income product decisions, as well as determining the right retirement date, and the right date to start drawing from your various income sources.
<On the slide:>
TITLE: "Typical expenses in retirement". The slide is organized into three columns showing how different expenses change during retirement:
- "Stay the same (keeping in line with inflation)": Groceries, Vehicles, Property taxes, Homeowner insurance, Utility bills, Rent, Life insurance
- "Decrease": Mortgage, savings for retirement, Retirement plan, No Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), Employment Insurance (EI), Work-related expenses, Taxes
- "Increase": Hobbies, Entertainment, Travel, Health Care
<End slide>
There is one last source of income to touch on. And that’s life insurance. When people think of life insurance, they often think of a beneficiary receiving a lump sum of money.
What you may not know is that a permanent life insurance policy may also have a savings component, known as a cash value. It can grow tax deferred over the life of the policy. You can access the cash value through loans or withdrawals.
Accessing the cash value could reduce the death benefit and there also could be tax consequences to consider. Your need for insurance must always be the reason for purchasing insurance, but it is a product that can be used to help supplement your retirement income while also leaving something behind for your beneficiaries.
These products are not offered in your employer sponsored plan. Work with your financial and tax advisors to determine if this is an option that is right for you.
<On the slide:>
TITLE: Life insurance as an investment
A policy focused on protection grows tax-preferred (within legislative limits).
You can access the cash value several ways:
- Policy withdrawal
- Policy loan
- Collateral assignment
Moving funds from taxable investments may lower your tax bill.
The tax-free death benefit is paid directly to the named beneficiary.
These products are not offered in your employer sponsored plan.
<End slide>
There are many things to consider in retirement. Don’t feel like you have to do it all yourself. Regardless of your income or savings level, a retirement plan is important. Working with an advisor can help you put strategies in place. This is good for your financial health, and your mental health.
According to the Canadian Mental Health Association, there is a direct correlation between stress and your overall physical and mental health. And there is also a correlation between stress and finances.
To assist you with your planning, Sun Life has a variety of tools available at sunlife.ca. We encourage you to explore them.
Consider working with professionals to build your knowledge and confidence. They can help you create a retirement plan that’s tailored to your unique situation.
<On the slide:>
TITLE: Next Steps
#1: Monitor
- Your CPP benefit estimate on Canada.ca
- Your QPP benefit estimate on retraitequebec.gouv.qc.ca
#2: Take Action
- Envision what you want YOUR retirement to look like
- Create a budget so you’ll know how much it will cost
#3: Create a plan
- Use the tools on sunlife.ca
- Work with a professional planner for personalized advice and support
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<On the slide:>
Thank you! The information provided is of a general nature and can not be construed as personal financial or legal advice. Neither Sun Life or its affiliates guarantees the accuracy or completeness of any such information. This information should not be acted on without obtaining counsel from your professional advisors, including a lawyer, notary, tax professional, or financial advisor (registered as Financial Security Advisors in Quebec) as may be applicable to your individual situation.
Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life group of companies.
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