How to lower your reliance rate during your retirement
Can you lower your “reliance rate” during retirement?
If you have decades to go until you retire, you don’t need to panic over volatile financial markets. You have plenty of time to regain lost ground and potentially achieve more growth in your investment portfolio.
But what if you are nearing retirement or already retired? After all, you will probably need to draw on your investments to pay for some of the costs associated with housing, food and the many other expenses you incur in daily life.
So, is a down market cause for alarm? It shouldn’t be.
And you can help reduce your stress level by understanding your “reliance rate.”
As its name suggests, your reliance rate tells you how much you rely on your portfolio — rather than other sources like the Canada Pension Plan (CPP), Quebec Pension Plan (QPP) and Old Age Security (OAS), your investments or an employer pension — to meet your income needs during retirement. So, for example, if you need $60,000 each year and $40,000 comes from your portfolio, your reliance rate is 66 per cent.
Your reliance rate can influence your emotions and investment behavior. A higher reliance rate may tempt you to make emotional decisions during a market decline, since your portfolio is supplying more of your needs.
However, if you respond to a steep market drop by making dramatic changes to your portfolio, you may actually increase the likelihood that your money may not last.
This is especially true if you move a large portion of your portfolio to cash, as cash does not typically provide growth potential to help keep up with inflation.
There is no recommended reliance rate for everyone, but, as a rule, the higher your reliance rate, the more sensitive your portfolio may be to fluctuations in investment prices. So what can you do to either lower this rate, or at least moderate the risk level attached to it?
Here are some suggestions.
ADJUST YOUR EXPENSES
During retirement, some of your expenses, such as commuting and other costs associated with work, will go down, but others — like health care — may go up.
You can’t control all these expenses, but the more you can keep them under control, the less pressure there will be on your investment portfolio to provide you with income.
REVIEW PENSION PLANS
Review your plans for your CPP or QPP, as the amount you will receive depends on many factors, like the age you start taking your benefits, your average earnings throughout your life and how long and how much you have contributed.
While many people will start taking their government pension at 65, you can start drawing as early as 60 or as late as 70. The monthly amount you receive will be reduced the earlier you start drawing and will increase to a maximum if you wait until 70 years of age.
So, if you can afford to push back the date at which you start taking your benefits, you could lower your reliance rate. But just remember to factor in all the relevant considerations, such as the impact a higher CPP or QPP could have on your marginal tax rate.
REVIEW OAS PLANS
Review your plans for OAS, which may be taken beginning at age 65 and can be deferred for up to 60 months in exchange for a higher monthly amount.
POSITION YOUR PORTFOLIO
Keep cash and short-term investments in your portfolio. Try to keep about one year’s worth of living expenses in cash or cash equivalents, plus about three to five years’ worth of expenses in guaranteed investment certificates (GICs) and other short-term income-producing vehicles.
Having these assets available can help you avoid liquidating long-term investments when their prices are down. Your investment portfolio will certainly be a key source of your retirement income. And by understanding how reliant you are on your portfolio, and the options you have for reducing this reliance, the better prepared you’ll be to withstand the inevitable market downturns.