Running out of money in retirement was a top fear of RBC Wealth Management clients in a 2023 survey. Here are some strategies to help keep your retirement income steady, even in the face of market turbulence.
Establish an emergency fund
In retirement, having an emergency fund is crucial. Set aside a portion of your savings in a liquid and easily accessible account, such as a money market fund or a high-yield savings account. This fund acts as a safety net during market downturns, confirming that you can cover your essential expenses without having to sell investments at unfavorable prices. Additionally, having an RBC Credit Access Line, through Royal Bank of Canada, can help you have access to liquidity to avoid selling assets as well as to prepare for any unexpected life events.
But once your emergency fund is developed, it’s important to keep it protected. RBC Insured Deposits offers you protection of cash with up to $5 million of aggregate coverage in Federal Deposit Insurance Corporation (FDIC) coverage per depositor in each insurable ownership capacity. Plus, any cash more than the FDIC limits is placed automatically into a U.S. government money market fund.
Annuities can be designed to provide a steady stream of income over a specified period or often for the rest of your life. A fixed annuity guarantees a fixed rate of interest for a specified period of time which allows for predictable growth during market volatility, while a variable annuity may increase or decrease in value based upon performance of underlying investment strategies. Income from annuities may be structured by adding optional riders to provide a guaranteed income stream for life based on the claims-paying ability of the issuer—helping provide peace of mind for retirees.
Create a laddered bond portfolio
Building a laddered bond portfolio involves investing in bonds with varying maturity dates. As each bond matures, you reinvest the proceeds in new bonds, maintaining a consistent income flow. This strategy helps reduce the impact of interest rate fluctuations and provide a predictable stream of income, regardless of market conditions. Also see the article titled Take advantage of fixed income opportunities during times of rising interest rates to learn more about bonds.
Strategize for tax impact
Make smart investment choices to minimize your tax impact and maximize your wealth. For example, your income may drop initially once you stop working and enter retirement, but you could be in a higher tax bracket later, when your required minimum distributions (RMDs) kick in at age 73.
If you’re in a lower tax bracket early in retirement, you could look at accelerating the distribution of your IRA funds before your RMDs begin. Or, you could take advantage of being in a lower capital gains tax rate to sell assets.
A Roth IRA conversion is another opportunity to maximize income while also considering the impact of taxes on future generations that may ultimately inherit your assets. This strategy aims to take advantage of lower income resulting in lower tax brackets early in retirement by converting assets from pre-tax to a Roth IRA. Those assets can then be withdrawn tax-free later, either when taxable income is potentially higher later in retirement or after death through tax-free distributions to beneficiaries.
When you need to tap into your investment and retirement accounts, the timing and order of how you draw down those accounts is critical and can make a big difference in the taxes you end up paying, and when you pay them.
Regularly review and rebalance
Market conditions can change rapidly, and your retirement portfolio should evolve accordingly. Set up an annual meeting with your financial advisor to review your investments and rebalance your portfolio to confirm it aligns with your risk tolerance and long-term goals. Rebalancing involves adjusting your asset allocation back to your target percentages to help prevent your portfolio from becoming too skewed toward a particular asset class that may be overly affected by market volatility.
Maintain a long-term perspective
While short-term fluctuations in the markets may cause concern— especially if you are in pre-retirement and looking forward to the next chapter of your life—as long as you stay invested, the loss is merely a paper loss, and doesn’t become a realized loss until you sell. History tells us that recoveries happen and the best offense is a good defense that holds the line. Retirement is a journey that spans decades. Maintain confidence in your diversified portfolio and your well-thought-out retirement plan and avoid making hasty decisions based on market noise.
Seek professional guidance
Navigating the complexities of retirement planning and investment management can be daunting, especially during volatile market periods. Contact your financial advisor to help you tailor a strategy to your specific needs and goals. And when markets become turbulent, he or she can provide valuable insights, help you keep emotions in check the next time the market takes a dip and help you make informed decisions even when the markets are turbulent.
Read additional articles in the Q4 issue of Investor's Edge.