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Maximizing Income During Retirement

When planning for income during your retirement years, most of us use the golden rule of a 4% retirement withdrawal rate.  If you and your spouse want $100,000 of income at age 65, you need investment assets of $2,000,000, including OAS and CPP incomes of $20,000. The 4% rule pretty well eliminates the risk of having a shortfall during your lifetime.  With the majority of physicians retiring with a portfolio of $1,000,000, not counting the home, the 4% rate translates to an annual income of $60,000. A monthly retirement income of $5,000 before tax may cover your basic living expenses, with little money left for European River cruises.  After a long career of helping patients, you may want to have some fun by increasing your withdrawal rate to 7% from your portfolio, thus boosting your retirement income from $60,000 to $90,000. What are the financial consequences of facing the prospect of depleted retirement savings during your life time?

The shortfall risk is the subject of a study titled “Spending Flexibility and Safe Withdrawal Rates” co-authored by Michael Finke, a professor in the department of Personal Financial Planning at Texas Tech University. The purpose of this study is to help clients better understand the trade-off between shortfall risk and the risk of not living well during the retirement years and how their risk tolerance affects the withdrawal rates.

The 4% withdrawal rate is overly conservative, according to Finke, as it assumes a risk averse couple at age 65 with limited stock market exposure and a portfolio able to withstand 30 years of retirement. By planning the retirement income over 30 years, we ignore the fact that at age 65, the probability of either spouse still being alive at age 95 is only 18%. When determining a safe withdrawal rate, we oftentimes ignore the fact that a person can make adjustments to his/her spending. You may prefer to increase your travel budget in your 60’s and 70’s, even if it means a higher probability of having to cut back on your dining and vehicle budgets in your 80’s.

The study also calculates a person’s exposure of depleting investment assets during his/her lifetime. According to Finke, if you are a 65-year old risk-tolerant investor with 70% of your portfolio invested in equities and a withdrawal rate of 7%, you could enjoy an annual income of $90,000 for 17 years until age 82 when your $1 million portfolio will be depleted.   No need to be ashamed, even if your friends think that you have been living beyond your means.  Boosting your withdrawal rate from the safe 4% to 7% means 50% more income  during the early retirement years, which can bring a lot of happiness and pleasant memories from extensive travels that you otherwise may not been able to afford . When you are in your eighties, you may choose to scale back on travels abroad and other discretionary expenses anyhow.  In addition to income received through Canada Pension and Old Age Security, you may also be able to supplement your retirement income by drawing from a home equity line of credit.

Many doctors worry that they will not have sufficient income to enjoy their well-deserved retirement.  Perhaps you may want to have a conversation with your financial planner to discuss the option of increasing the shortfall risk so that you can spend more during the early years of your retirement.

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