The Enlightened Investor-Retirement Income

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Eventually investors move from the “saving-years” to the “drawing-years”, when they want to start drawing retirement income from their portfolios.

This can be confusing. For many the natural inclination is to liquidate their diversified portfolio in favor of income-producing stocks or bonds. However, the idea that retired individuals should load up on dividend-paying common shares or high yield corporate bonds is a misconception. Dividends are great but, not if it means adding the significant risk that can come from owning individual stocks (companies).

If the primary goal is to maximize after-tax retirement income, then the safer way is to adopt a total return portfolio strategy. In other words if you had a balanced and diversified portfolio prior to retirement that was appropriate for you it should also be appropriate post-retirement.

The Mechanics of Retirement Income and the Total Return Approach*

  1. Maintain an appropriate asset mix. Gradually reduce growth investments in favor of fixed-income investments as you age and your circumstances dictate.
  2. Add up all sources of income from:

 

  • Pensions; either from work or government sources
  •  In non-registered accounts; naturally occurring income from dividends and interest income
  •  Required withdrawals from registered accounts such as RIFs
  •  Income from holding companies

 

3. If you require additional income, sell capital, likely beginning with non-registered accounts first. Doing so allows tax-sheltered assets to continue to grow tax-free. Remember, you are investing for a total return—capital appreciation from your growth investments and income from income investments. As long, as your total spend rate is lower than your total portfolio return, then your capital will not be diminished. Also, sell only the required amount of capital to avoid paying unnecessary tax on income you don’t need. This is a great time to talk to your tax advisor to confirm the best approach for you.

Dividends are great, but to invest your portfolio at retirement age solely in income producing securities is flawed and risky advice. The safest and most tax-efficient strategy for producing a retirement income is to maintain a diversified portfolio and follow a total return portfolio income strategy.

If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to email us.

Written by Chris Turnbull, Portfolio Manager at the Index House, a division of Polaris Financial Inc. and author of Your Portfolio is Broken: Who’s to Blame and How to Fix It! (09.2014)

*Footnote: Adapted from C. Jaconetti, Spending from a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors (The Vanguard Group, 2007)

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