If your retirement income plan depends primarily on selling capital to meet ongoing spending needs, it may be worth asking whether your portfolio is truly designed for retirement. (photo from elevatefinancial.ie)
For many Canadians approaching or living in retirement, the constant market gyrations create a lot of anxiety. They wonder, is a recession around the corner? Will the next market meltdown delay my retirement or reduce my retirement income?
When you are young, market volatility is what you want. It allows you to invest more when markets are down to capture more upside potential when markets rebound. But what if you are no longer building up your portfolio and need to draw income in retirement? Market volatility feels very different when it directly affects your retirement and your need for income.
In retirement, actual income – not “annualized returns” – pays the bills. Monthly expenses such as housing, travel, medical goods and services, family support and charitable giving continue regardless of market conditions. What’s worse, the cost of living goes up every year.
Many retirees don’t realize this vulnerability until after retirement begins. The plan looked solid on paper, but, once withdrawals start, the pressure changes. Income becomes personal when you no longer have employment income to rebuild, and more fragile if your retirement plan depends on regularly selling investments to generate cash.
Importance of an income strategy
A growth portfolio often generates very little in the way of cashflow. An investment plan that relies on selling capital to fund ongoing spending is not truly an investment plan. It is a liquidation plan. While selling assets occasionally may be appropriate, a portfolio that requires ongoing sales to meet cashflow needs introduces structural risk. Timing matters – particularly during market downturns, when selling can permanently impair future outcomes.
Beyond market timing, assets sold to fund today’s spending are no longer available to generate income, recover in future markets or provide flexibility later in retirement. Over time, this can narrow options and increase dependence on market conditions when stability matters most. This is why effective retirement planning focuses on cashflow by design, built around spendable income, not assumptions that require the markets to always rise.
Tax-smart investing
Just as important as how income is generated is how it is taxed. In Canada, retirement income can arrive in many forms – interest, dividends, capital gains, return of capital, and registered withdrawals – and each is treated very differently for tax purposes.
Two retirees receiving the same cashflow can experience materially different after-tax results depending on how income sources are structured. Strategic changes can make an enormous difference in allowing retirees to keep more in their pocket each month.
The bottom line
Many portfolios are built successfully for growth. But a portfolio designed for growth is not automatically designed for retirement. When the objective shifts from building wealth to funding life, portfolio structure must evolve.
If your retirement income plan depends primarily on selling capital to meet ongoing spending needs, it may be worth asking whether your portfolio is truly designed for retirement – or is it a growth portfolio disguised as a retirement portfolio?
Shay (Shy) Keil is a senior wealth advisor at Scotia Wealth Management who works with established retirees and business owners, helping them structure sustainable, tax-efficient retirement income through strategic cashflow planning.