If at age 60, you’ve managed to save $1.2 million for retirement, this amount is over twice what many of your contemporaries typically have set aside.
according to Statistics Canada
.
However, despite the substantial amount involved, it’s crucial to handle your sizable savings wisely. You might consider relying on dividend income from your investment portfolio or gradually drawing down your overall assets over time.
Don’t Miss
- The following five magical financial strategies can assist in climbing Canada’s wealth hierarchy in 2025, with each action being completable in mere minutes.
Here’s how
- Emergency veterinary costs can soar up to $4,000 – however, adequate insurance can cover these expenses.
you can safeguard your pet without emptying your wallet
- Seize command of your investments — utilize these
five research-backed strategies
to invest more wisely and build your fortune now!
Relying solely on investment income
A
2024 CPP Investments survey
discovered that 61% of Canadians are more concerned about exhausting their funds during their retirement years.
One of the great aspects of retiring with portfolio income is that you do not deplete your capital; thus, theoretically, it can remain stable or even increase instead of diminishing.
However, it requires substantial capital to produce enough income for sustenance, particularly with dividend yields being so low nowadays.
The average
S&P 500 dividend yield
is currently just 1.27%. Even if you assemble a portfolio of individual stocks with higher dividend yields, you may only be looking at 5%.
For a portfolio valued at $1.2 million, that equates to an annual income of $60,000, which might or might not suffice to sustain your current standard of living.
Certainly, it isn’t advisable to have your whole investment portfolio contained within just one asset.
stocks
A more secure approach would be to divide your investments between stocks and bonds, potentially yielding just below a 5% return. This is achievable, but whether this level of income meets your financial requirements will depend on your specific needs.
Bear in mind you’ll also receive the CPP benefit. As for the average retired worker,
gathering approximately $808 each month
Or if you postpone receiving it, you might see up to $17,200 in annual benefits.
By combining these government pension earnings with the income from your investment portfolio, you will have an annual retirement income of slightly more than $77,000 per year.
Read More
- “I anticipate a 80% downturn once this concludes”: The billionaire investor, known for forecasting the previous two market drops, states that the current sell-off is merely the start.
Here’s how to safeguard your investment portfolio.
However, there’s an important catch: Even though relying on your portfolio income helps protect your initial investment to some extent, neither the growth of that portfolio nor the income it generates can be assured.
Market volatility means your stocks could fall in value, eroding your principal. Stock dividends aren’t guaranteed the way bond interest and principal are guaranteed, assuming you hold the bonds to maturity.
Another drawback of relying solely on income is that you might gradually lose your ability to buy goods and services because of inflation, which pushes up expenses over time. If the yearly income generated by your investment portfolio remains constant at $60,000 annually, it might suffice initially during retirement, yet prove insufficient after 10 or 20 years as retirement progresses.
The “total return” approach
An alternative strategy involves living off both the income and the principal from your investment portfolio—the “total return” method—gradually reducing your capital while benefiting from dividends.
This method offers greater flexibility. You have the option to dispose of major assets and capitalize on market increases. As your investment portfolio expands, adopting a total return strategy provides increased potential for yearly earnings, which helps in maintaining pace with inflation.
Here’s an example of how this could function. Suppose you possess $1.2 million and opt to adhere to the 4% rule, reducing your capital by 4% each year with the aim of making your funds endure three decades. During your initial year in retirement, you would get $48,000 as yearly income. Should inflation increase by 2% the following year, you’d withdraw $48,000 along with an additional 2%, which amounts to $960, bringing your total withdrawal to $48,960.
As your investment portfolio grows in value, you have the option to continually adjust your withdrawal amounts according to inflation, which makes it simpler to stay ahead of rising costs associated with daily living.
The 4% rule serves merely as a guideline. When establishing your withdrawal rate, several additional elements should be taken into account such as prevailing market conditions, your portfolio composition, and how long you expect to live.
For example,
Morningstar found that
A 3.3% withdrawal rate proved ideal for retirement savings in 2021; it increased to 3.8% in 2022; and settled at 3.7% in 2024.
This indicates that although the “total return” strategy provides greater adaptability, it demands ongoing adjustments to match both market dynamics and your individual requirements. Therefore, it’s wise to seek assistance from a financial advisor capable of helping you modify your withdrawal amounts when necessary.
With this strategy, should your investment portfolio decrease in value, you might need to reduce withdrawals temporarily until the markets stabilize. It’s advisable to keep one to two years’ worth of living costs in your savings account. This allows you to avoid touching your portfolio for some time if necessary.
It’s crucial as well to include income-generating assets in your portfolio, which assist in increasing its worth annually. Earnings from dividends and interests might aid in compensating for any declines in the market.
In summary, regardless of the strategy you choose, having the appropriate balance of investments is essential.
Sources
1.
Statistics Canada:
Economic Family Types’ Assets and Debts According to Age Group, Across Canada, Provinces, and Selected Census Metropolitan Areas: Survey of Financial Security (October 29, 2024)
2.
Y Charts:
S&P 500 Dividend Yield
3.
Government of Canada:
CPP Retirement Pension: The Amount You Might Receive
This article
At age 60, I’m preparing for retirement with $1.2 million set aside. My strategy involves living off of dividend income rather than selling my investments. But is this approach riskier compared to one focused on total returns?
originally appeared on Money.ca
What To Read Next
- Boost your savings and reduce taxes — look into this option.
right investment account
For your current financial objectives today - I’m nearly 50 years old and realize my retirement savings aren’t sufficient. What steps should I take next? Stay calm.
Below are 6 effective methods for getting back on track:
- Retirement offers liberation and transformation. Moving from a consistent paycheck to healthcare perks, explore what vanishes.
after
when you cease working — plus
how to get ready to prevent unexpected issues
The content of this article serves purely informative purposes and should not be interpreted as advisory. No warranties of any sort are provided with this material.
