Retirement Income Centre
A Paycheque Portfolio™ Approach: Retirement Income the Right Way
Have you ever been driving somewhere and suddenly find yourself wondering if you’ve got enough fuel to complete the trip? Your gas gauge is flashing yellow, you’re an hour from your destination, and there’s not a service station for miles. We’ve all been there. It’s an unsettling feeling, which makes for a very stressful journey.
Running on empty is never a good feeling – especially when it comes to retirement.
How enjoyable will your golden years be if you’re constantly worried about running out of money, or if every single decision has to be weighed carefully with an eye on your monthly investment statements?
Unfortunately, that’s the reality for many Canadians. According to a recent survey¹, half of Canadians said they often worry about outliving their money, while 76% plan to work longer than their parents to retire comfortably.
As a former advisor with 40-plus years of experience in the industry, I’ve spent the better part of my career helping clients build the sustainable income they need in retirement. For most people, entering the retirement phase is a really big transition. For their entire working life, people have been building their assets, and now all of a sudden they’re in a position where they’re in the spending phase of retirement. Psychologically, that's a big corner to turn for people.
It's also a period of conflicting objectives. On the one hand, retirees want to spend money and perhaps travel while their health is good; on the other hand, there’s a very real fear of outliving their income. And there’s no shortage of news items stoking retirees’ fears – especially articles about that “magic number” they’ll need to live comfortably. Is it $500,000, $2 million, or $5 million? In my experience, there really isn’t a “magic number.” It’s not a realistic approach.
How do you build a viable retirement plan when so many variables, like quality of health and life span, are unknown? That’s why a focus on income is so important.
Changing the Retirement Conversation: From Decumulation to Income
As Canadians enter retirement, we often hear the word “decumulation” to denote the spending phase. However, I’m not a fan of that word, and here’s why. When we talk about accumulation, it brings to mind a buildup, or increase, of capital that will subsequently be used to generate the income retirees will need.
However, the word “decumulation” suggests the exact opposite: that we're on a critical path to totally spending all of our money. We don't want that to be the mindset of the retiree. By eliminating the “decumulation” mindset, we're making retirees more comfortable with this idea of the sustainability of their assets to deliver that retirement income.
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Paycheque Portfolio™ Approach: Re-envisioning Retirement Income
Retirement doesn’t have to be an inevitable depletion of assets. That's not been my experience with the clients we've worked with over three-and-a-half decades – and that’s across a broad range of wealth levels.
Instead of focusing on a “magic number,” the key is having a strategy that allows us to continue to deliver the retirement cash flow people need, but at the same time, not be selling the investments that are generating that income – especially at a point in time where the investments are down in value. This distribution strategy, which I call the Paycheque Portfolio™ approach, has one central focus: to deliver consistent income in bull and bear markets alike.
In the 15 years we used the Paycheque Portfolio™ approach, if we didn't sell the investments, if we didn't move to cash (even when we're taking income from the portfolios), the account values have always, without exception, recovered and ultimately exceeded the value that they were prior to the downturn in the market.
Four Simple Words: Spend Income, Not Capital
As a retirement income planner dedicated to building sustainable cash flow I was continually focused on four key words: spend income, not capital, which is really the central focus of the Paycheque Portfolio™ approach. It’s a strategy that lets income arrive without having to sell anything – even in market downturns.
The point being, you don't have to sell anything to get the paycheque you need to fund your retirement, which allows time for the investments to recover in value after they've gone down. We have seen that little miracle repeatedly. I cannot underscore how important the last part of that phrase is, psychologically speaking, when markets and account values are down. The income is steady, in bull and bear markets alike.
"Spend the income, not the capital," is a motto that people can embrace and understand. They can see it. It's proven to them over and over again that it's efficient, that it works, and that it’s sustainable. And it’s extremely easy to service for advisors. That's worth a lot for both clients and advisors.
While no retirement strategy is perfect, paycheque portfolios sure check a lot of boxes.
¹ Source: Benefits Canada, “76% of Canadians expect to work longer than their parents to retire comfortably: survey,” May 26, 2023.
