Nov 16: BEST FROM THE BLOGOSPHERE
November 16, 2023
A “Goldilocks” approach to retirement focuses on guaranteed sources of income
Writing in Forbes, Steve Vernon notes that annuities can be a way to find a “just right,” or Goldilocks solution to making sure you don’t run out of money in retirement.
Those living off lump-sum savings (the article is intended for a U.S. audience, so here it might mean money in a registered retirement income fund (RRIF) or similar capital accumulation vehicle) “to pay for their living expenses face a serious challenge,” he writes. “How do they carefully invest and draw down their retirement savings to spend on living expenses, with the goal that they don’t outlive their money and recognizing that they might live a long time?”
If you are gradually drawing down income from a lump sum account, he writes, there is “a dilemma: spend too much, and you might run out of money in your 80s or 90s. But if you’re overly cautious with your spending, then you might not spend as much as you could have,” and won’t know that until you “finish your retirement.”
It’s the fear of running out of money in retirement that makes some retirees really watch their spending. Those on the “spend too little list,” he writes, “want to prevent being broke in their later years. While that might be financially prudent, it’s unfortunate that they aren’t enjoying retirement as much as they could.”
And here’s where the “Goldilocks” strategy enters.
You need, he explains, to “build a portfolio of monthly retirement paycheques that are designed to last the rest of your life, no matter how long you live.” As long as you spend less than that amount, “you can feel confident that you won’t outlive your money.”
So what does this guaranteed income portfolio consist of? Here in Canada, it would include your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, which are paid for life and are inflation-protected. Some of us also get the Guaranteed Income Supplement (GIS).
The article says other “guaranteed” sources of retirement income could be money from a workplace pension, “income annuities,” and also “payments from a reverse mortgage.”
Vernon says that if you add up all the “guaranteed money,” and get an income total, “then you’ll have a target for managing your living expenses.” The bigger the gap between your income and your expenses, the more prepared you will be for “the surprises that are inevitable over the course of a long retirement.”
If the math doesn’t work in your favour, and your guaranteed income is going to be less than your expenses, there are options out there for upping your income, Vernon adds:
- Downsizing: As housing is typically the most expensive cost for retirees, downsizing is “win-win” in that you reduce your housing costs while “finding a home that might better suit your needs in retirement,” he writes.
- Transportation: Vernon notes that it is cheaper to run one vehicle than two in retirement. Relying on public transportation and “not purchasing a new car until it’s absolutely necessary” can also dramatically cut your costs.
- Shared expenses: “Look for ways to share significant expenses with close family and friends, such as carpooling, buying food in bulk to divvy up, and even (sharing) housing,” he writes.
- Working part time: “Working part time in your 60s and 70s can really help pad your income, particularly if you have a small margin between your total retirement income and your living expenses,” he notes.
Vernon concludes by noting there is never a bad time to calculate (and adjust) your living expenses to align with your income, even if you are already retired.
Converting some or all of your registered retirement savings plan savings into a lifetime annuity has long been an option for Canadians, with the main alternative being to continue to invest your money within a RRIF. Similar options are available to Saskatchewan Pension Plan members.
Annuities sort of became less popular when interest rates were low, because the lower the interest rate, the higher the cost of the annuity. But in this higher interest rate environment, annuities are worth thinking about. A great SPP feature is that you can choose to convert some or all of your savings into an annuity within the plan – you don’t have to transfer money over to a third party to get the annuity.
Great news! SPP’s flexible Variable Benefit option is no longer limited to those members living within the borders of Saskatchewan. Now all retiring SPP members across the country can take advantage of this provision, which puts you in control of how much income you want to withdraw, and when you want to withdraw it. You can also transfer in additional savings from other unlocked registered sources. For full details see SaskPension.com.
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Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.