From paycheque to portfolio: planning your retirement income
One potentially challenging aspect for high-net-worth individuals entering retirement is moving from the security of earning employment or business income to relying on investment income to fund their lifestyle. At first, it can feel a little like a high-wire act without a safety net.
“Employment income can be like an annuity,” explains Newport Portfolio Manager Jordan Schwann. “You have set cash flow, usually some kind of yearly increase pegged to inflation or performance bonuses or top-up distributions from your business, but then that just stops one day.” It’s a shift that can generate financial anxiety and an unnecessarily difficult start to anyone’s retirement journey.
That’s why it’s important to develop an effective plan and position your investment portfolio as a new kind of paycheque—one robust enough to support the retirement you envision.
Build a spending plan based on your lifestyle
A logical starting point is to get clear on your anticipated expenses. Ultimately, how much you spend will be driven by what you do in retirement – and that will change over the course of your retirement.
“It’s unrealistic to expect to spend a fixed amount per year for the rest of your life,” Schwann points out.
Factors such as long-term healthcare costs, your life expectancy, lifestyle or philanthropic goals and family financial responsibilities should all influence your projections. Schwann’s advice is to work with your advisor to build a spending arc that estimates early-, mid- and end-of-life retirement expense needs.
And include your family in the discussion. Make sure they understand not only your retirement objectives, but how those plans could impact any eventual transition of wealth.
Create an automatic system of withdrawals
At Newport, we commonly structure a system of cash withdrawals for our clients that, as much as possible, will mimic employment income in terms of timing and amounts. Monthly or quarterly distributions of fixed amounts can really help to create the feeling of having a salary and make the transition easier.
So how do you make consistent withdrawals from investments that may have inconsistent returns?
Make realistic market assumptions
The first recommendation is to use realistic financial planning models. “Most financial plans make the assumption that you’ll earn a set rate of return in the market extrapolated over many years, but that’s obviously wrong,” Schwann says of the many factors and market shocks—think the COVID-19 crisis—that can impact a financial plan.
“We’ve started to introduce not only an expected rate of return, but also projections of how volatility can impact returns to show clients a range of possible outcomes, which can go a long way to providing comfort.”
Pay attention to how your portfolio is managed
Turning your portfolio into a reliable retirement paycheque means generating a quality rate of return through a lower-volatility investment approach that helps to minimize risk and protect your wealth.
Of course, generating income is a greater challenge in a low-interest, low-yield environment—and that’s where having the right mix of assets and expertise makes the difference.
In Newport’s case, for example, our low-to-medium-risk retirement portfolio has a running yield of 4 per cent, with about 85 per cent of the portfolio generating stable income.
Because we diversify by asset class and managers, management styles, geography and other factors—while having access to private and alternative vehicles such as real estate and private debt that generate income above that of a dividend or bond portfolio—we can mitigate risk and make projections with greater confidence. These types of investments allow us to generate more of our return from cash flow (e.g. dividends, interest income, distributions) — making it easier to plan regular withdrawals than would be the case with growth investments.
Understanding how your portfolio is balanced and how it’s managed will help to align retirement spending with your financial realities.
Even the best-laid plans need to be flexible. Schwann says that many retirees embrace the concept of dynamic spending to ensure they don’t overspend. In basic terms, it means scaling spending up or down depending on market conditions and your personal circumstances. “Sometimes it takes people a few years in retirement to figure out the level of spending for their lifestyle needs, which is when the dynamic spending concept can be beneficial,” Schwann says.
Perhaps most importantly, it’s about understanding that your retirement is a dynamic time—and situations change. It’s important to be realistic about what you can spend and what you can earn over the long-term to fund your expenses.
By planning and taking the steps to produce a healthy portfolio paycheque, you’ll remain financially flexible and in a far better position to manage the challenges and opportunities of your golden years.
In our next blog post, we will discuss how to structure your withdrawals most effectively from a tax perspective.
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