Moving beyond a "magic number" approach to retirement

This article is sponsored by Dynamic Funds

When thinking about retirement, Canadians have traditionally aimed to build capital and then draw from this pool over the following decades. But by focusing on that “magic number” they’ll need to save for retirement, people may be taking the wrong approach, says Daryl Diamond, Chief Retirement Income Strategist at Dynamic Funds.

“In my experience, a ‘magic number,’ based solely on portfolio account values, is not the best way to build a sustainable retirement,” Diamond says, adding, “Is that magic number $1 million? Or $2 million? Who knows? It’s simply not a realistic approach.”

Instead, Diamond says the focus should be on the income to be generated by the portfolio.  This is because, like so many other aspects of retirement income planning, everything needs to be assessed on the unique details of the clients’ situation.

“I commonly hear from pre-retirees that they want to know what things are going to look like at the time they expect to retire.  Account values alone don’t really tell you much.  The amount of income that can consistently be generated from the accounts is a much more meaningful measure. That’s why we prefer a Paycheque Portfolio approach to retirement that allows retirees to spend income, not capital.”

Diamond continues, “Think of it this way: instead of investment accounts, let’s assume that you own an apartment block at the time you retire.  And the rent that you receive from this property is what you will use to fund your retirement cash flow.  Over time, the value of that property is going to fluctuate with real estate markets.  But your income isn’t based on property value -- it’s coming from the rent being generated by the property. This fact alone allows you to tolerate fluctuations in market value because you are spending income, not selling the property.”

As a former financial advisor focused on retirement income planning for nearly three decades, Diamond says “spend income, not capital” was his firm’s retirement mantra.

“Our experience in using this strategy is that during volatile and negative markets, income is still being delivered and the investments simply stay intact. Units are not being sold to create a withdrawal,” he says.  “As a result of these factors, we have repeatedly seen account values recover.  That is a very comforting result for retirees.”

Building a Retirement Plan: Three Key Questions

With a Paycheque Portfolio approach, Diamond says that pre-retirees and their advisors need to answer three essential questions: “How much monthly income will I need in retirement?” What assets do I have to generate that income?” And finally, “Is it sustainable?”

In answering these questions, Diamond notes that pre-retirees can see the amount of income that can be generated, relative to the amount of cash flow needed, so it’s much easier to determine if they’re in a position to retire and whether or not the income will be sustainable. 

Less Stress in Volatile Markets – For Both Retirees and Advisors

“If we're basing the retirement income on sustainable payments that are being made through Dynamic’s Paycheque Portfolio approach, then it helps to reduce some of the anxiety retirees feel during market downturns and volatility,” Diamond says.

“There are far more fun ways to spend time in your retirement than white-knuckling it as markets and accounts values fluctuate.” And Diamond says the Paycheque Portfolio approach also results in less stress for financial advisors, who aren’t having to send lifeboats out to all their clients during every market downturn.

“For advisors, its far easier to service accounts using the strategy because there’s less buying and selling. And it’s far easier for the administrative staff to ensure everything is compliant.

On Choosing Dynamic Funds

As a former advisor dedicated to helping retirees build sustainable income, Diamond says he often, although not exclusively, relied on Dynamic’s products to execute the strategy. “Dynamic is an industry leader when it comes to investment funds that deliver a regular monthly income,” Diamond says, adding, “The shelf of offerings is among the broadest in the industry, and the history and consistency in the delivery of income has been excellent,” he adds.

For more information on the Paycheque Portfolio^TM approach, please read When it comes to retirement, there is no magic number  - Why Dynamic’s paycheque portfolio approach focuses on income, instead of account values.

Find out more at dynamic.ca/RIC or contact your Dynamic Funds Sales representative.

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