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Finding Retirement Income During Temporary Market Declines

Optimize Team January 05, 2023
Elderly couple walking to the street.

Periods of economic slowdown can make it particularly challenging for those who are nearing or have entered into retirement.

Withdrawals from investment accounts when portfolio values are temporarily depressed may deplete an account faster than anticipated. Those entering retirement earlier than expected due to job loss may face compounding challenges associated with underfunded investment accounts and an extended retirement time horizon. Beyond these challenges, we are all facing historically high inflation, which may require higher account withdrawals than previously expected.

While it’s never easy to see portfolio values under pressure, we expect the markets to eventually resume their upward climb. This is why it’s important to leave funds within a portfolio where possible to allow values to recover. There may be strategies that can help reduce demands on a portfolio. In brief, here are some thoughts, noting that individual situations vary depending on factors such as income sources, taxation rates, lifestyle considerations and more:


Evaluate your liquid inflows — Having an understanding of your liquid assets is important, including income you receive through government benefits and employer pensions, as this may be sufficient to meet your living expenses. For many, delaying government benefits like the Canada Pension Plan (CPP) makes good financial sense, especially for those who have longevity on their side. However, some may need these benefits to supplement income. Others may pick up part-time work to generate income, shorten a retirement time horizon and increase a retirement portfolio by allowing a longer period of compounding for existing funds or through additional contributions.


Evaluate your spending — Due to inflation, money doesn’t go as far as it used to, especially for essential expenditures like food and gas. A budget may identify opportunities to reduce non-essential expenses and potentially reduce the need for income. While a general rule of thumb used in the investing industry has been a four percent withdrawal rate for retirement income, at the onset of retirement this may be high. Spending can change dramatically over a retirement life cycle and depends on many factors, and maintaining a budget can help to provide a clearer picture of income needed at any particular time.


Consider the sources of withdrawal and the impact on taxes — Withdrawing from investment accounts has the potential to trigger taxes. In addition to required withdrawals from a Registered Retirement Income Fund, this may put you in a higher marginal tax bracket. As such, you may consider withdrawing from non-taxable sources, such as the Tax-Free Savings Account. If you are turning to taxable assets, it may be beneficial to take advantage of tax-loss selling, as 50 percent of a capital loss can be used to offset taxable capital gains. Or, there may be benefit in selling assets with the highest cost basis first, then moving to assets where the cost basis is lower to reduce a potential tax hit. However, you may also wish to consider lifetime tax optimization; if you expect to be in a higher marginal tax rate in future years, this may impact your decision. Consider your asset allocation and the differing tax rates on types of income — When generating retirement income from non-registered accounts, be aware of the differing income tax rates on interest, capital gains and dividends. Fixed-income investments like guaranteed investment certificates (GICs) are taxed at higher marginal rates than capital gains and Canadian eligible dividends. A non-registered portfolio weighted towards income that generates primarily eligible dividend and capital gains will generally produce a higher after-tax income compared to a portfolio more heavily weighted in fixed-income products.