Finance 2. Get smart about spending: be flexible Of course, the bigger problem with the 4% rule is that it doesn’t really account for what’s going on in the real world. What happens if a market downturn puts a dent in your investment holdings in a particular year – should you still withdraw 4%? Conversely, if your investments have appreciated more than expected over the past year or so (we’re looking at you, Facebook, Amazon, Netflix and Google investors), can you withdraw more? Both of these situations illustrate the need for flexibility when it comes to your spending rate. Sure, such an approach creates some fluctuation in howmuch you can spend from year to year – and not all retirees are comfortable with that. But if you have the luxury of being able to adjust your spending in the here-and-now to account for what’s going on with your investment portfolio, then such an approach could help you end up with a lot more income in the future. Of course, there are some expenses with which you can’t be flexible: the hydro bill needs to be paid no matter what the stock market is doing, for example; ditto for any prescriptions which you may have. But for a lot of other expenses – particularly those “bucket list” expenses that we mentioned above – you have at least a little control over when you pull the spending trigger. 3. Figure out your government benefits You probably know about government retirement benefits such as the Canada Pension Plan (to which every working Canadian is entitled) and Old Age Security (which is mostly for lower-income retirees). What you may not know is that deciding when you opt into receiving those programs can make a difference to the income that you receive. Generally, you have the ability to begin your CPP any time between age 60 and 70, and your OAS between 65 and 70. If you choose to take your CPP earlier than age 65, you’ll reduce your payments by 7.2% per year. If you choose to start after you turn 65, you’ll enhance your payment by 8.4% per year, or by 7.2% per year for OAS. So what’s the smart strategy here…at what age should you start taking your benefits? A full discussion would take more space than we have here, but you can find reasoned arguments in many online sources, both for taking benefits early and for taking them later. Ultimately, you’ll want to consider not only the mathematics of your personal finances, but your feelings about security and peace of mind as well. It’s a good idea to discuss the possibilities with a financial planning expert. There are a number of “what if ” scenarios to work through, and a fair bit of math to deal with. Sure, it’s possible to work it out all by yourself, but having a second opinion from someone who knows their way around these benefits can really help put decisions in perspective. 4. Get reacquainted with fixed income Traditional wisdom suggests that, as you approach retirement, you should slowly shift your portfolio allocation toward income-producing investments such as bonds and GICs. Fair enough but, with the rock-bottom interest rates which we’ve seen over the past decade or so, putting money into low-interest bonds and similar products has been difficult to do. So much so, that an entire generation of retirees has somewhat ignored fixed-income as an asset class, opting instead for other income-producing assets such as high-yield stocks, preferred shares, real estate investment trusts (REITs), covered call strategies and other options. But things look to be changing. Since the beginning of the year, the U.S. Federal Reserve has raised its trend-setting interest rate two times, and has signalled that there’s at least one more hike to come (and possibly two). As of writing, it’s not clear whether Canada’s Central Bank will do the same, but it’s a pretty safe bet that the era of pitifully low rates on bonds, GICs, T-bills and other fixed-income investments is finally coming to an end. If you’re not super-familiar with these investments (and over the past 10 years, you’ve had little reason to be), nowmay be the time to get reacquainted with them. Government bonds are usually the go-to investment for income seekers – building a “ladder” of bonds of various maturities can be a simple, cost-effective way to boost income from your portfolio. Another alternative is a bond ETF or mutual fund, both of which offer a great way to get a diversified portfolio of government bonds (or other bonds) at a very low price. For those with higher risk tolerance, corporate bonds offer higher yield than government issues, while bonds from emerging markets countries offer a way to diversify your bond portfolio. CSANews | SUMMER 2018 | 31
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