A Quest for Income at Retirement – Can you Make it Alive?

If you are a reader of this blog, you are certainly an investor. I often communicate with my readers through my mailing list and I realize that we are all looking for the same things:


#1 We want to invest savings and make money

#2 We seek dividend payouts since it’s a great way to generate a stable income

#3 We are looking for high quality information – not the bogus trading tip of the day

#4 We are concerned about retirement – looking to build and manage our nest egg


We all invest savings because we figured it was one of the best ways of ensuring a paycheck coming each month at retirement. Some of us are lucky and benefit from a super solid pension plan from our employers. For the rest, you’re likely left managing your money and making sure you can retire… one day!


How do you invest for retirement?

How do you invest your money once you retire?

How can you make sure you have enough?


This is your quest for income at retirement. Let’s try to find some answers today!

What Will Be Your Main Income Stream?


The first step for retirement planning is to identify which sources of income will be available at retirement. Here’s a quick list of sources you may have:


Most common retirement income sources:

  • Government basic pension. Both Americans and Canadians receive a basic amount from the Government. The amount may vary according to your contributions while you work and your total declared income at retirement.


  • Retirement account. Individual accounts that are usually tax sheltered prior to withdrawals. These accounts motivate individuals to save money sheltered from taxes in order to build their nest egg.


  • Employer’s sponsored retirement account. Similar to individual accounts but sponsored or administered by your employer. The most generous plans include a “free” contribution from the employer each time the employee contributes. For example, an employer can match up to 5% the employee contributions. A variety of mutual funds are often available within such accounts.


  • Defined Contribution Pension Plan. Similar to an employer sponsored retirement account. There are usually more rules concerning withdrawals than employer sponsored retirement accounts (which you can withdraw pretty much when you want but will have to pay taxes).


  • Defined Pension Plan. A pension paid by the employer upon your retirement, as opposed to the defined contribution pension plan, the amount of the pension is known in advance. The pension is usually based on a percentage times the number of years worked. The investment side is 100% the employer’s responsibility. We know how it ended for a giant like GM!


Alternative sources of income:


  • Sideline. One can continue to work part time while being officially retired. This is why we meet so many Wal-Mart greeters older than our parents. It can be a part time job for a company or being self-employed.


  • Rental income. Rental properties are fairly popular among retirees since they generate a steady flow of income. However, you need to deal with tenants and some maintenance is required over time.


  • Private company income. You can decide to become a silent partner in a private company and cash in dividends. It is a riskier investment as your money is concentrated in only one business.


  • Annuities. This is a contract between a life insurance company and an investor where the company pays the beneficiary on a monthly basis in exchange of a lump sum payment at the beginning of the contract. This is some kind of “homemade” defined pension plan for individual investors.

Will You Have Enough?


As you can see from the above mentioned list, most of your retirement income sources are derived from your investments as an active worker. Unless you want to depend on the Government’s social security to retire, you are pretty much forced to save money on the side and build your own pension plan.


The key question is always “will you have enough?”. What’s worse than running out of money once you have quit your job and lost the opportunity to make money working. Unfortunately, I won’t answer this question in this post. The reason is simple: the magic retirement number is different for everybody. It depends on your lifestyle, life expectation and capacity to generate passive income.


Someone who owns a sizeable investment portfolio can generate important dividends plus interest revenues and therefore might not even have to withdraw from his capital. The same situation can happen if you have built a real estate mini empire bringing in enough rent each month to support your lifestyle.


Unfortunately, this perfect retirement scenario won’t happen for most of us. Therefore, we need to work harder and manage our money carefully.

How Can You Generate Stable Revenues From Your Investments?


Without any surprises, my favorite way to generate stable revenues from my investments is to buy dividend stocks. I believe that if I spend the next 30 years building a strong investment portfolio, my dividend payout will definitely be enough to support my lifestyle at retirement. I can make this happen by using a double digit dividend growth investing strategy.


Still, dividend investing is not perfect. As with any other investment strategies; my portfolio value will go up and down as the market swings. There isn’t much I can do about it. Dividend cuts are also another possibility. We all want to buy dividend growth stocks but it’s not always what happens over time. If the dividend payout is not big enough to support my retiree budget, I will have to gradually sell stocks and cash out my capital. A few bad years on the market and my retirement plan may be at risk.


Other options are not necessarily better. If you decide to go with a safer option with your portfolio, you may turn to certificates of deposit and bonds. The problem is that there are risks with fixed income too. Currently, the interest rate on a bond portfolio is not even high enough to cover inflation. Therefore, you may quickly hit the point where you will need to sell your bonds to live. If interest rises (as was the case in June 2013), your portfolio value will also take a hit. Definitely, bonds are not the safest place to invest your money either.


Real estate is intriguing but also risky. When you think about it, buying a rental property and collecting the checks each month seems like a pretty straightforward way to ensure your retirement plan. Unfortunately, this won’t be easy. You still have to spend time and money managing your property. This includes finding good renters and dealing with the bad ones. Repairs and maintenance costs can also grow significantly if you keep your property over the long haul. Eventually, the roof and windows will have to be changed, this could cost a lot more than your annual trip to Europe planned in your retirement dreams.


In a perfect world, we would all receive a guaranteed monthly pension. If I could paint a perfect picture of a retirement plan, it would definitely include a 100% secured monthly payment. This definitely exists with Gov’t social security but the check is not big enough to truly enjoy retirement, right?


If the Government would offer an enhanced version of their social security that we could buy in order to receive a bigger check each month, I would buy it right away, wouldn’t you? I found such products but it’s not sold by Governments, it’s called an annuity.

What Are Annuities?


An annuity is a contract sold by a Life Insurance Company where the investor makes a lump sum payment in exchange of a defined series of payments. Most of the time, these payments are made monthly and stop upon the beneficiary’s death.


For example, let say you have 100K to invest in order to generate retirement revenues. If you invest it in the market, you may get a 3-4% dividend yield and your capital (the 100K) may be subject to fluctuations. If you buy an annuity, you may receive a monthly payment of $500 which would be the equivalent of making 6% on your investment. The payment will be assured as long as you live and you won’t have to worry about the market swings.


The interest return of an annuity depends on your age and health. Obviously, if you are 80 and buy an annuity, your monthly payment will be higher than someone who buys it at the age of 55. The main downside of a fixed annuity is that you can’t touch your capital once the contract is signed. Therefore, you are assured to receive your monthly payment, but you can’t access your initial investment of 100K.


As any other financial product, there are pros and cons. When included in a retirement plan, the annuity contract could definitely contribute to your retirement base income and reduce your risk.


How Annuities Could Fit In Your Portfolio


Since you can’t get your money back once you invest it in an annuity, I don’t think it’s a good idea to invest the bulk of your nest egg in such product. Annuities should be viewed as a complimentary product to your retirement plan. The security offered by such a contract is quite interesting and ensures you will always receive a base income.


Instead of buying bonds in your portfolio, you could keep your dividend stocks and add a % of your portfolio in an annuity. Depending on your needs it could be anywhere from 5% to 25%. Over 25% seems like a big liquidity risk. Plus, interest rates are not awesome these days so you won’t hit the jackpot with your annuity.

Many Questions Raised About Annuities – Is This a Scam?


You probably have heard about annuities in the past. There are several bad things said about them when they are not sold properly (and with ten thousand expensive options!).


I’ll be honest with you; the world of annuities is bigger than the Pacific Ocean. There are tons of options (called riders) where you can modify your annuity payment, the type of investments and how you can receive your money. I think the best annuity contract is the simplest one: a fixed annuity where you pay a lump sum payment and receive monthly payments.


The other options are usually too pricey for what they provide! There is no scam with annuities but I strongly suggest you meet with more than one life insurance agent before your make your decision!


PSST! If you are looking for more info about annuities, I’ve found an awesome ebook to download for free! click here to read my post about it!

What’s Your Plan to Retire Successfully?


On my side, I’m quite lucky as I benefit from a fully secured defined pension plan. Therefore, my worst case scenario is to retire at the age of 58 with 70% of my income + Gov’t pension + my dividend portfolio. So technically, I shouldn’t have much trouble at retirement. If I didn’t have my employer’s pension plan, I would definitely look for more ways to assure my retirement income.


What’s your retirement plan?

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  1. says

    Good post Pierre!

    For me..here’s how I intend to break it down…

    CPP, I’m not relying on it. If I get it, great, it’s gravy. OAS, same.

    I hope to have a 20+ year pension from work, we’ll see. I’ve got 13 years in already. Ideally, 25-year pension.

    After that, counting on dividend income. Hopefully $30k per year.

    I wouldn’t mind a bit of blog income as well. Maybe enough for a trip south each winter?? Any money from the blog would be great, I don’t have an online empire like some very hard-working entrepreneurs – although those folks give me inspiration to get after it more and more :)


  2. says

    annuities are an interesting animal. if it does seem like a good fit, then simple contracts with a simple guarantee are usually best. all the extras really start to add up in regards to cost

  3. says

    I’m similar to Mark. I hope to recieve some Social Security (US citizen) but not counting on it. I will also be getting an employer pension payment. I also put 10% of my income in my 401k retirement savings plan with a 4% employer match that I will draw from in retirement. Last I plan on living off of the dividends I am building up in my dividend growth portfolio.

  4. RICHARD says

    Nice overview of the options Pierre.
    What seems to be left out is that, in Canada at least, the governments want those deferred RRSP tax revenues back. So as of 71 yrs you are obliged to pull money out of tax sheltered accounts even if you do not need it (rent, inheritance, Lotto 6/49, etc). So that $1millon you socked away gets drawn down by 7.38% in the year you turn 71. Unless you have one hell of a dividend payout you are going to deplete the principal over time as the payout increases every year. This does not mean you have to spend the money. You can always put it back in to a TFSA if you have more than enough. Eventually your RRSP(s) will be depleted. It is just a question of time.
    Personally I am counting on QPP, OAS, RRSP(s), TFSA and some non-registered investments.
    My only concern is that the government does not pull a Grecian formula and say they can not afford to pay out what was promised. What do they care? After all they are assured of their pensions, gold plated I might add.

  5. says

    Wow, you are set to go.
    70% of my income + Gov’t pension + my dividend portfolio. That’s great. I’m sure you’ll still have online income too.
    I think part time work is probably the answer for most people. A little income goes a long way in retirement.

  6. Mike says

    **BTW, the article was written by me (Mike), but I got some technical issues so I asked a friend to publish the article (this is why you see “Pierre” as the author).


    You can certainly count on CPP and OAS, you can trust a financial planner’s word on that ;-). We may have to retire at the age of 70 by then, but we will get the both Gov pension. If they don’t pay for it, they will have another problem to face: a bunch of old aged homeless people!

    @Fiscally Fit,
    I’ve done a lot of research about annuities lately and I’ll be giving more thoughts about this topic shortly… as long as my technical issues are resolved (I’m having a hard time posting right now ;-( ).

    How much do you plan on receiving from your dividend? How much do you think is enough?

    Yeah… it’s important to not forget the 71 yr old RRSP rule! you will have to pay taxes on those withdrawals but it will also make a nice TFSA investment fund! Another strategy is to start withdrawing from your RRSP’s before 71 and manage your marginal tax rate overtime with smaller withdrawals.


    I certainly think that teenagers will have a hard time finding part time job at one point when all the old people will “take their jobs!” hahaha!

  7. RICHARD says

    Hi Mike;
    Thanks for the feed back. I have been wondering how I will go about drawing down my savings. I think I would rather leave the RRSP’s alone as long as I can and draw down my taxable non registered investments first. That way I can still grow the RRSP’s. Yes, that will (hopefully) mean that my RRSP principle is higher and therefore subject to a larger withdrawal when the time comes (71)but I will have more than most likely depleted the non-registered investments (car, cruises, etc)so the tax payable just might be less once the RRSP’s kick in. Plus, again hopefully, I just may be able to ride out the the first RRSP mandatory withdrawals with a little cash balance and the dividends they are paying.
    I am even wondering if I can get the income supplement that way as I would only have a diminishing taxable non-registered income other than QPP & OAS Once the non-registered funds are depleted I can always run on the TFSA to keep my income at the minimum for the supplement.
    OH the devious ways to get some of our tax dollars back. Just might be good for a year or two on the supplement.
    Take care

  8. Mike says

    Hello Richard,

    You might want to check different scenarios with a financial planner. They have access to retirement planning software that will tell you which scenario is tax optimized.

    Chances are that waiting until 71 to withdraw your RRSP will be the best one but it is truly a case by case scenario.

  9. RICHARD says

    Thanks Mike;
    I do have access to a finacial planner, MD Finacial, who drew up a retirement scenario for me. This was before they realized that I was doing quite well as a dividend investor on my own. After all, they do want to make money “managing” my monies. MD Finacial is attached to the College of Physcians. I manage to get free access to them as my daughter is now a doctor. Nice to know you raised your kids right and you can get some pay back – LOL.
    At any rate they basically had me depleting the un-registered funds first. Seemed fairly logical so I have developed various scenarios to see if I can get the OAS supplement. That would be a nice trick to pull off. If I can leave my RRSP’s alone for a few years, no withdrawals (RIF) then it might quite well be possible. I have to weight pulling out all the monies in the non-registerd funds (stocks) versus the dividends they would pay and what I could get from the top up to OAS. I am not that rich that I do not have to worry about the time span on RRSP (RIF) withdrawals. Then again, as one ages, you become more aware of the obits and just how long people live on average. Even the rich seem to surcome to below average death rates, inspite of their well funded retirements. I have told my doctor I wanted to live to 200. HEY! Life can be fun after all.
    Somehow I just might not make it there though. And, for some reason, I do not think my RRSP will hold out that long LOL. Guess I will have to count on the kids. Payback time.


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