Mark Brisley: Oscar, welcome, and thanks for being here today.
Oscar Belaiche: Thanks for having me, Mark.
Mark: The evolving demographic landscape in Canada would dictate that a significant number of Canadians are facing the transition of the accumulation years of their investments to needing to take those investments and generate retirement income. As we think about that and how they prepare for those retirement income years, what is the goal of a pre-retiree?
Oscar: The first point, the demographic point is that the baby boomers, which are a huge block, are now half the baby boomers have reached retirement age, the traditional 65-year-old retirement age and the other half will in the next 10 years. That's a huge amount of people that are needing to figure out how to replace their wages and salaries with an income stream which is what their goal should be as you move into retirement, how do you generate enough income from the capital you've accumulated and create that income stream for your retirement income?
Mark: Being an experienced portfolio manager with the equity income team, in your experience, what is the mindset of the pre-retiree and retired person?
Oscar: There are two points to this. There's a mindset change that takes place. Instead of figuring out how to accumulate assets, you've got to learn to live off of your assets effectively, to deccumulate your assets. Hopefully not too quickly because the other primary consideration is you don't want to run out of money before you die.
Mark: Taking the goals and the mindset into consideration, how does an investor assess their needs as they head into retirement?
Oscar: You really have to start from scratch and review your expenses and income required to maintain your lifestyle. In order to do that, you basically have to put together your personal balance sheet, which includes your assets and your liabilities, and your income statement, which includes your income and expenses in order to start to determine how much income you need for your retirement.
Mark: There's clearly a lot of considerations that an investor has to take into account, so how do they best solve for the retirement question?
Oscar: Of course, the advisor is very, very important in this process because they understand how you can create multiple income sources and they would understand the retirement investment income spectrum, which is very important as well. The first thing you have to do is assume your life expectancy, i.e, how much time you think you need, or you will be in retirement. Commonly, that's considered to be 30 years, so if you're 65, you'd be planning to live through to 95, and of course, your needs would go down over time because you won't be as active as you get older.
Then you have to consider your asset allocation strategy, how much cash, how much fixed income, how much equities, how much real estate, et cetera. Then you have to create your multiple income sources, which could include your basics like Canada Pension Plan but, of course, from where we sit, we think that it's very important to increase your dividend income or other income that you can get, for example, from real estate investment trusts because fixed income and cash today doesn't provide much yield for you to generate for your retirement.
Then, of course, if you can't generate enough income to meet your expenses, either you would delay retirement or you would have to reduce your expenses in order to have sufficient income stream to fund your retirement.
Mark: Many of our viewers, I would imagine, have heard of, or read about the 4% rule when it comes to retirement income planning. Can you explain a little bit about what that is and what are the latest thoughts on that subject?
Oscar: There was a famous research paper done in 1994 by a gentleman called Bengen and he came up with a 4% rule that you can withdraw 4% of your principal that you have invested plus the inflation rate every year and that you shouldn't outlive your retirement savings and that that should be sufficient for a 30-year time horizon, i.e, that 65 to 95-year-old time span.
However, as we've seen lower fixed-income rates, the rule has been recently modified. There was a Morningstar study that just came out in November of 2021 and it is suggesting that that rule should now be 3.3% plus inflation. Very simply, if you have a million dollars that you've saved up, you should be able to take out $33,000 a year, call it a little under $3,000 a month from your principal and you won't run out of money.
The key, though, is how much do you need a month? Because maybe it's not 33,000 or 3,000 a month. If you need 6,000, then you'd need $2 million of capital to be able to draw on with that goal of not running out of money before you die.
Mark: As we emerge from the global pandemic and recovery is more top of mind, so too is the discussion around inflation. Why is inflation bad for retirees?
Oscar: We're seeing a pretty significant inflationary pressures right now. Part of that 4% rule or the 3.3% updated rule is it's 3.3% plus an adjustment for inflation. The higher the amount of inflation, the more you have to take out of your principal, which means the harder it is for that principal to last for that 30-year period. As costs increase, the pressure grows on the remaining principal.
As an example, what we're seeing today is that you've got inflationary pressures on, if rates rise, on mortgage costs if you're paying rent on rent, on property insurance, on property tax, on car insurance, on gasoline to drive your car, on gas to heat your house, and et cetera, et cetera. Goods are more expensive, and food is the other big one. Food is going up. Even if you cut a lot of expenses, food prices, there's also cost pressures there as well. Inflation's a very, very significant concern for retirees who need to be able to survive off that principal that they've set aside for their retirement.
Mark: If we take all of the points discussed so far into consideration, is there a solution that you and the equity income team would want investors to consider as a solution for their retirement income needs?
Oscar: Yes, absolutely. The team that I'm part of, the equity income team at Dynamic Funds, specializes in equity income investing, and that is investing in equity securities that pay a dividend or a distribution. We created the Dynamic Retirement Income Plus Fund, which is a cross-asset equity income fund.
What the cross-asset fund does is it invests across a broad spectrum of asset classes, which include dividend-paying companies, real estate investment trusts, preferred shares, mortgage rates, business development corporations, closed-end funds, private equity, private credit, private real estate and infrastructure. A whole number of different types of equity income investments. We do this across North America primarily, but we also do it, to a lesser extent, globally.
What you're getting is this entire group of assets that specializes in investments that generate an income stream, and we do our best to invest in those entities that have sustainable yield, such that the investor, the retiree can count on that as part of that, what we call the 3.3% solution, which is the goal the retirement rule of thumb to generate an income stream for retirees, going back to first principles, to replace their wages and salaries so that they can live off of their investment assets and not run out of money as they move further and further into their retirement years.
Mark: Oscar, thank you for those valuable insights, all important considerations as investors prepare for retirement. I appreciate you being here today.
Oscar: Well, thanks very much for having me, Mark.
