The 4 Ms: Your Blueprint for Retirement Income Planning
Taxes, inflation, market swings and untimely drawdowns can all wreak havoc on your client’s nest egg. By focusing on the 4 Ms – maximize cash flow, minimize taxes, minimize drawdowns and maintain purchasing power – you can build more resilient portfolios designed to deliver steady cash-flow … through bull and bear markets alike. Let’s take a closer look.
Maximize Cash Flow
By concentrating on income-producing assets during retirement, investors can create reliable cash flow in order to avoid withdrawals during market downturns.
If we can deliver all of a client’s needed withdrawal through income distribution, then we're not at a point where the client has to surrender any units of the investment, or liquidate any capital to fund what we're trying to withdraw. The more income that these specific investments generate, the less stress there is on the portfolio, and on retirees’ peace of mind.
Minimize Taxes
Building consistent income requires a special focus on maximizing after-tax cash flow. The more tax efficient, the better. If we can withdraw less to get a dollar to spend in retirement, that helps to preserve capital and maintain the sustainability of income over the long term.
When it comes to minimizing taxes, it’s important to stress that there’s no “one size fits all” solution; every situation has to be assessed on its own merits. It’s essential to always understand how the decisions you make today, in terms of which income sources to use, will impact a client’s situation — be it seven or even 17 years from now.
Minimize Drawdowns
Focusing on cash flow can help reduce the impact of drawdowns, which can quickly erode a portfolio’s value. For retirees in a bear market, the idea of a double drawdown — being forced to sell holdings that have fallen in value in order to fund living expenses — is truly a nightmare scenario. However, as you’ll see in the following real-life example of a retiree who has been taking income from a Registered Retirement Income Fund account for 10 years, a focus on maximizing cash flow can help preserve capital — even in bear markets.
For illustrative purposes only. Distributions are not guaranteed and may change at any time at the discretion of the fund’s Manager.
Source: Diamond Retirement Planning Ltd.
Maintain Purchasing Power
To protect purchasing power — especially during inflationary periods, it’s critical to allocate a portion of one’s portfolio to asset classes and strategies designed to deliver positive inflation-adjusted returns over time. One strategy that has proven itself in protecting purchasing power is growth. A dedicated allocation of say 10% to a growth strategy has the potential to deliver returns that can help offset the long-term impacts of inflation.
By focusing on the 4 Ms, we are proactively investing in a retirement income strategy to address volatility and negative markets — before they happen. When markets go down, you won’t have to ask “What should I do?” You’ll have already done it, well ahead of time.
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The information provided is not intended to be investment advice. Investors should consult their own professional advisor for specific investment and/or tax advice tailored to their needs when planning to implement an investment strategy to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
To the extent this document contains information or data obtained from third party sources, it is believed to be accurate and reliable as of the date of publication, but 1832 Asset Management L.P. does not guarantee its accuracy or reliability.