How to build retirement income

Jan 23, 2019
 Middled aged couple in the kitchen reading tablet

One of the most difficult things to plan for is the number of years that will need to be funded during retirement.

Canadians are living longer and our longevity continues to increase. Will you need retirement income to fund 25 years? Maybe 30 years? More?

It’s troublesome because it can affect your sense of security during retirement. Some people feel anxious, never knowing how much they can safely spend each year. Others worry that they’ll outlive their savings.

There is, however, an effective way to alleviate these worries — by creating a retirement income floor. The “income floor” refers to the amount of annual income required to meet only the basic living expenses. With this strategy, the income floor is covered by guaranteed and ultra-conservative investments.

The retirement income floor does more than provide peace of mind — it also helps with other aspects of financial planning during retirement. Knowing that your basic expenses are covered can give you more freedom to pursue higher-yielding fixed-income and growth-oriented investments. For estate planning, it’s easier to determine what you can leave to the next generation when you’re not worried about outliving your nest egg.

Calculating your retirement income floor

Step 1: Estimate expenses

It all starts by estimating the amount of your basic living expenses for a typical year. This includes household expenses such as utilities and mortgage payments, health care, insurance, and income tax.

Remember to include any specific items that are unique to you or your family, but stick to the essentials. Lifestyle expenses, like vacations, discretionary travel, or the cost of a new car, are separate from your income floor.

Step 2: Add up guaranteed sources of income

The next step is to determine the annual amount of your Old Age Security (OAS) and Canada/Quebec Pension Plan (CPP/QPP) benefits. Add any other pension you receive, plus any regular income source, like rental income. If you have a spouse, combine the amounts for the two of you.

Is your guaranteed-income total sufficient to cover your essential expenses from Step 1? For many people, the answer will be no. The gap between the two is the shortfall in your retirement income floor.

Step 3: Decide how to fund the floor

There are a wide number of options to choose from when it comes to funding your retirement income floor, and we can work with you to determine which best suit your risk tolerance and personal preferences. The choices may include:

  • Guaranteed or highly secure income-generating vehicles, such as Guaranteed Investment Certificates (GICs) as well as treasury bills, money market instruments, government bonds and mutual funds that invest in these.
  • Annuities — typically a life annuity which provides a guaranteed annual income stream for as long as you live.
  • Your own investments. Part of the mix may be income from your Registered Retirement Income Fund (RRIF), Tax-Free Savings Account (TFSA), and/or non-registered investments.

How we can help

The income floor strategy can easily be implemented at any stage — before you retire, upon retirement, or anytime during retirement. No matter what stage you’re at, talk to us if you like the idea of knowing that your basic needs will be covered for as long as you live.

We can also help you with other important decisions, such as when to begin taking CPP/QPP benefits. With the income floor approach, government benefits typically start upon retirement but, depending on your situation, it may be to your benefit to delay the start, even to age 70, or to start early.

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