Generating Cash Flow in Retirement

Once you’ve stopped working your objective shifts from growing your investment portfolio to determining how to convert a large lump sum of retirement savings into a regular income stream that will last as long as you do. 

Managing decumulation can often be more difficult than the accumulation.

Here are some strategies for getting cash flow from your retirement portfolio.

1. Total Return Strategy

The investor holds a small number of broadly diversified ETFs or mutual funds.  After withdrawing the amount needed for annual living expenses, the retiree rebalances their holdings to the target allocation.

By rebalancing, it forces the investor to sell appreciated assets on a regular basis while leaving underperforming assets in place or adding to them.

To make life easier and avoid rebalancing multiple funds consider a “one-stop-shop” asset allocation ETF that gives you a globally diversified mix of stocks and bonds in one fund. 

As an example, for a traditional mix of approximately 60% stocks and 40% bonds consider Vanguard Balanced ETF Portfolio (VBAL) or iShares Core Balanced ETF Portfolio (XBAL).

One disadvantage is if there is a prolonged market downturn your withdrawals can drastically erode capital and reduce future return potential.  That argues for holding a comfortable cash cushion of at least 3 – 5 years worth of living expenses – in a high interest savings account and laddered GICs.

2. Taking income only

Using this strategy, the retiree subsists on whatever income their bond and stock holdings generate.  The value of the assets is maintained.

Our parents could buy GICs and bonds yielding a safe 10 or 12%, but those days are long gone.  Now you may not get much more than 2 or 3%.

More investors have been leaning toward dividend paying stocks instead.  Critics of a dividend income strategy believe these investors refuse to tap into their capital.  However, unless you’re someone who has quite a large amount invested – enough to generate a livable yield – or wants to leave the assets to beneficiaries, this is not the case at all.

Dividend investors use the payouts to supplement their other retirement income.  In reality, most will need to dip into their principal at some point.

Be careful when hunting for yield.  Good quality blue chip companies regularly increase their dividend payments, but they are not guaranteed.  Changes to a company’s dividend policy could occasionally result in payouts being reduced or eliminated altogether.

3. Annuity

The purchaser receives a stream of lifetime income in exchange for a chunk of their cash.  This is appealing to those individuals without pensions.  The best payoff from an annuity comes from living much longer than average.

There is a certain peace of mind when you know you won’t run out of money.

The drawbacks are loss of control and lack of flexibility.  The funds are no longer available if a lump sum is required for large expenses.  Payout usually ends at your death, so leaving money to your heirs is off the table.

Many annuity types (such a variable annuities) carry high costs which can erode some of the benefits. Each additional feature – survivorship, term guarantee, inflation protection, etc. – will reduce the payment amount.

The Bottom Line

On retirement, employment income must be replaced.  This usually means supplementing income from pension plans with investment income.  

Most retirees will use a combination of two or three of these withdrawal strategies to generate retirement cash flow.

It’s important to build an appropriate level of flexibility into your plan so you can manage income needs and expenses, and also be able to choose the timing of your withdrawals to when market conditions are the most favourable.

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2 Responses

  1. Vince P. Mayne says:

    A retiree’s income replacement strategies should also incorporate tax considerations. Income taxes can significantly erode a pensioners wealth.

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