Figuring Out the Puzzle: Embracing Multiple Income Streams in Retirement

Welcome, retirees and soon-to-be retirees, to a discussion that's at the heart of transitioning into your new phase of life. As the golden years approach, the transition from relying on a single paycheck during your working years to managing multiple income streams in retirement is a significant shift. Understanding and effectively managing these various income sources can lead to a more secure and fulfilling retirement. If you’re like most Canadians preparing for retirement, you have many questions on your mind and MANY outlets providing you information. Between the opinions of friends, family members, and financial news sources – reputable or not…. it can be overwhelming.

One of the most common questions we get when meeting with clients is “how in the world do I get money to spend in my retirement years? I’m losing the one guaranteed source of income I have had my entire working career – my paycheque” (or, several if you have multiple income streams already such as rental income, investment income, etc.). That paycheque has helped to pay for your mortgage payments, groceries, car expenses, children’s sports/activities and so much more. How will you be able to cover these costs moving forward?

Let's delve into this transformation, understanding the dynamics of each income source and how they collectively contribute to a more secure retirement. You must familiarize yourself with the nuances of each income stream – their timing, tax implications, and varying degrees of reliability. It's no longer a matter of waiting for a predictable deposit every two weeks or at month’s end; it's about managing multiple income sources, each with its own rhythm and fluctuations. While it can be confusing to shift to this new way of getting money into your bank account, a good Financial Planner will make your life 10x easier by helping you make sense of it all.

Here are but a few of the income sources you could be eligible to receive in retirement:

1. Canada Pension Plan (CPP) and Old Age Security (OAS): Foundation of Stability

CPP and OAS often serve as the bedrock of retirement income. These government-backed programs offer a reliable “indexed” income stream, providing a sense of financial security to retirees.

Like most Canadians, you’ve resided in our country since the day you were born. Once over the age of 18, each year gets qualified for Old Age Security (OAS). If you resided in Canada for over 40 years past the age of 18, you receive the below amounts:

https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/benefit-amount.html Furthermore, when you worked you and your employer were likely paying into the Canada Pension Plan (CPP). For all those years, the government has a fun formula to tell you how much you’ll receive depending on when you take it. It can be started anytime between 60-70. Each year you start it before 65… the less you get and the longer you delay it, the more you receive.

2. Group Plan Income: Rewarding Dedication

For those fortunate enough to have employer-sponsored pension plans, this is the amount accumulated through your employers contributions and yours over the years. It can be either your defined benefit: monthly pension or you can take it as a lump sum. The alternative is a defined contribution plan – this is your plan that is invested (per your selections), it can also be used to provide you retirement income. 

3. Investment Income: Growing Your Wealth

Investments, whether in stocks, bonds, mutual funds or other types, can be a substantial addition to your retirement income. While they carry risks, well-managed investments can offer potential growth and dividends from your accounts: RRSP, RRIF, LIF, TFSA, etc. It could be worth more than what you have right now, if in an RRSP, RRIF and LIF that growth is taxable only when you withdraw it.

4. Rental Income:

Owning rental properties can be a lucrative source of income in retirement. Proper management and maintenance of these properties can lead to a steady stream of cash flow.

5. Other Income Sources: Embracing Diversity

This could include part-time work as most retirees go back to the work force in their early retirement years for the social aspect, to stay busy or to make extra money for travel or other reasons unique to each of us. Other sources include reverse mortgages, using a line of credit, amongst many others.

Great, you’ve helped me understand a few of the different options out there but how will I get the amount I need to still pay the bills? Good question.

With money coming in from different sources, the Bucket Strategy is designed to give you the required amount of income you need (after taxes have been paid) to live your most fulfilling life in retirement. See below for a pretty picture I helped create to simplify this complex strategy in a visual format. I’m a numbers guy so this is the best art you’re going to get.

In English, all of these sources of income can provide you the amount of money you require for your monthly spending. Less to the CRA (or Pac Man for the pictures sake), more in your pocket… in a legal way of course 😊. It will look different for everyone. It’s new and can be quite confusing / complex. It is your new paycheck. There will be some challenges adjusting to this new normal.

Let’s look at an example to simplify things. Today, we have Tom and Jennifer coming into the office to discuss their transition to retirement. Both are 65 years old and need guidance on where to take money from for their lifestyle spending. They each have a TFSA, some RRSP’s and Jennifer has a group plan through her work. They don’t know where to begin.

Of those buckets to use for their retirement paycheck…. they want their investments to grow for the future: to pass on to their children or use for themselves if needed. Tom worked for an automotive manufacturer for his entire career, he was fortunate enough to get a monthly pension. His spouse Jennifer worked as a sales representative so she has no pension from work which really stresses her out. She isn’t sure how to provide / pay for the bills in retirement which is why she has kept working in recent years.

If you are like most retirees or pre-retirees you likely need guidance on where to begin. Which accounts should be used, when, how much?

The first step is always some number crunching. Going back to Tom & Jennifer, they estimated that their dream lifestyle including a trip annually to a tropical destination along with all the expenses back home such as groceries, utilities, entertainment and so on which added up to $6,000 / month. Tom & Jennifer’s retirement paycheck look like this:

This ensures they get the amount they need to live the lifestyle of their dreams. Their hard saved RRSPs help give them some money every month and what isn’t withdrawn keeps growing. Also, the TFSAs and Jennifer’s group plan to grow for their future shall they require it or leave money for their children.

The world is changing and you need someone in your corner. If Tom and Jennifer’s situation resonated with you in some way…. I recommend working with a CFP® and a qualified CPA Accountant to get your affairs in order. As you embark on this journey or navigate its intricacies, remember: multiple income sources isn't just a trend; it's a strategy for financial resilience and the freedom to enjoy your retirement years to the fullest. Cheers to a fulfilling and financially secure retirement!

What are your thoughts on this evolving landscape of retirement income? How have you approached diversifying your income streams in retirement or while preparing for it? Let's continue this conversation in the comments below.

DISCLAIMER:

The contents of this letter does not constitute an offer or solicitation for residents in any other jurisdiction where either Cody Weber and/ or Sterling Mutuals is not registered or permitted to conduct business. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Mutual funds provided through Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. Mutual funds are not guaranteed, their values fluctuate frequently, and past performance may not be repeated.