The fear of running out of money can creep up on you late at night, while driving or standing in line at the grocery store.

It hits when you least expect it.

The goal is to reach the point where you can tell yourself, “I’m okay.”

But the question underneath where that fear resides is often the same:

When my paycheque stops, what will replace it?

For decades, employment provided a predictable rhythm of income.

Money arrived on a regular schedule, and you built your lifestyle around it.

Then retirement begins and the paycheque stops, but the spending continues.

Groceries, property taxes, utilities and insurance premiums keep coming.

Spending might even increase during the first few years as you travel, complete home projects or enjoy activities you postponed while working.

Replacing employment income is one of the most important jobs of a retirement plan.

Start by identifying the income gap

Most Canadians will receive retirement income from CPP, OAS or a workplace pension.

But those sources might not cover the full cost of the lifestyle you want.

The difference between what you expect to spend and the regular, dependable income you receive is known as the income gap.

Closing that gap is one of the central responsibilities of a retirement portfolio.

Many portfolios were originally built during the accumulation years, when the main objective was growth.

That objective changes once retirement begins and regular withdrawals become the norm.

A portfolio designed to build wealth might not include a clear process for turning that wealth into dependable, predictable income.

Without one, you may be in a situation where you need to sell investments along the way to fund your life, including when markets are down.

Why the timing of withdrawals matters

Selling growth assets during a market downturn can reduce the capital available to participate in a future recovery.

This is known as sequence-of-returns risk.

Two retirees could earn similar average returns but experience very different outcomes depending on when market declines occur.

That is why retirement planning requires a deliberate strategy for funding monthly spending.

Enter the Income Bucket

At PKAG, the Income Bucket is designed to support predictable cash flow while reducing the likelihood that long-term growth assets will need to be sold at an unfavourable time.

The process begins by identifying dependable income sources such as:

• Rental income
• CPP and OAS
• Annuity payments
• Workplace pensions
• Other recurring cash flow

The remaining income gap can then be addressed through portfolio assets and a coordinated withdrawal strategy.

Cash, GICs, fixed-income investments and other income-oriented assets all play a role, depending on the family’s circumstances and risk tolerance.

The objective of the Income Bucket is to identify where retirement income will come from, when it will be needed and how withdrawals can be made tax-efficiently.

That could involve coordinating income from RRSPs, RRIFs, TFSAs and non-registered accounts.

Why keep income and growth separate?

The Income Bucket supports near-term spending.

The Growth Bucket helps the portfolio keep pace with inflation and replenish capital over a retirement that could last 30 years or more.

Keeping them separate can also create an important behavioural guardrail.

When markets decline, retirees will feel the pressure to sell because withdrawals still need to be made.

But when several years of planned spending have been set aside, it could be easier to give growth investments time to recover.

What pension plans can teach individual retirees

Canada’s major pension plans build their investment strategies around the payments they expect to make in the future.

The questions for an individual retirement portfolio are similar:

• When will the money be required?
• What payments will need to be made?
• Which income sources and investments will support them?

It’s worth asking whether your portfolio has been structured around the income you need to draw from it.

Questions to ask your advisor

Many people who attend our seminars already work with a financial advisor.

But they might not have had their portfolio explained in terms of how it will replace employment income.

A useful question to ask is:

Which parts of my portfolio are intended to fund my near-term income, and which are intended to support longer-term growth?

You might also want to ask:

• How is inflation reflected in the plan?

• How will my withdrawals be funded if markets decline?
• How long is the strategy designed to support my lifestyle?
• How are taxes considered when income is drawn from different accounts?

These questions can help you understand the role each part of your portfolio is expected to play.

Retirement requires income, growth and tax strategy to work together.

That might be what a good night’s sleep is worth being able to say:

“I’m okay. I know where my retirement income is coming from.”

Would a second set of eyes help you determine whether your portfolio is structured for retirement?

Contact us with any questions or join one of our free, no-obligation seminars to learn more.

Sign up here today.