Traditional financial plans say you can withdraw 4% of your initial portfolio value every year (with inflation adjustments). But low interest rates or a long bear market may force you to adapt. If you’re concerned about outliving your savings, plan to be flexible with withdrawals. “People get anchored to a specific amount, but you need to review it and make corrections occasionally,” says Steve Lowrie of Lowrie Financial in Toronto.
Being flexible about your retirement date helps too. Do the math and you’ll be amazed at the difference if you work a year or two longer: you get an extra year of income and an extra year with no withdrawals from the portfolio. Working part-time in retirement will also help your savings last.
You should never take more investment risk that you can stomach, but your portfolio will likely last longer if you allocate more to stocks. A mix of 50% stocks and 50% bonds might be suitable for disciplined retirees.
You’ll also ensure there’s more money later on if you delay taking CPP. The maximum benefit for a 65-year-old in 2013 is $1,012.50 month; but wait until you’re 70 to collect, and it increases by 42%. Starting in 2013, you can also defer your old age security benefits. The reward is an extra 0.6% per month after age 65, which works out to a 36% larger payout if you start at 70.
When you do start drawing down your accounts, make withdrawals tax-efficient. “The conventional wisdom is you should draw down on your nonregistered assets first, but there is no one-size-fits-all solution,” Lowrie says. If you take early retirement, it may be smarter to tap your RRSPs first, before government benefits kick you into a higher tax bracket. To save even more tax, make sure you split pension income with your spouse. After age 65 you can split RRSP withdrawals 50-50.
Buying an annuity—a lump sum you pay to an insurance company in exchange for a lifetime income—is the ultimate hedge against longevity. You can annuitize part of your nest egg and ensure your basic expenses are covered for the rest of your life.
Finally, if your portfolio ever does run dry, tapping your home equity is a last resort. “Most people don’t like to do that,” Lowrie says “but it’s there in case you need it.”
10 ways to catch up fast if you’re feeling behind
1. Plug the holes in your spending. “If you’re 50 and haven’t saved anything, you probably have a spending problem,” says Spencer Tilley, co-founder of RT Mosaic Wealth Management.
2. Take what your employer will give. Whether it’s a pension or an RRSP with contribution matching, take full advantage of workplace savings plans.
3. Crank up the savings when the mortgage is gone. If you redirect $1,800 each month, beginning at age 50, you’ll have $480,000 by 65 (assuming a 5% return).
4. Borrow to invest—carefully. An RRSP catch-up loan can make sense if you’re in a high tax bracket. “But you need to use the tax refund to pay down part of the loan,” Tilley stresses
5. Advance your career. Ask your employer how to upgrade your skills and earn a promotion and a raise.
6. Self-employed with no savings? Think about a more traditional job with a pension or other retirement plan.
7. Pay yourself first—not your kids. “. They can get student loans, but you can’t get a retirement loan.
8. Stop sitting on cash. Waiting for a correction before investing your idle cash? Don’t, Tilley says. “A pullback may never come.”
9. Lower your investment costs. Switching from high-cost mutual funds to low-cost ETFs can reduce your fees by up to two percentage points.
10. Lower your expectations. No one likes to hear it, but planning to spend less in retirement is sometimes the best option.