Q: I’m a 65-year-old independent contractor with no company pension and plan to retire in two years. I have a self-managed, direct investing account made up of TFSAs and registered savings plans holding a mix of ETFs and stocks that has a current balance of $980,000. In three years, my wife will get a small amount from the Canada Pension Plan and I will receive close to the CPP max, and we will both apply for Old Age Security. I plan to sell my individual stocks and purchase ETFs. With this in mind, I am intrigued to learn more about the “paycheque-style portfolio,” and wonder if we could live off the dividends combined with our CPP and OAS income.
We asked Linda Shick, partner and portfolio manager at Family Wealth Counsel, part of Raymond James Ltd., to answer this one.
This is a great question, as it gets to the heart of retirement planning: cash flow, she said. “Before building a ‘paycheque portfolio,’ the most important step is estimating your monthly income needs,” Ms. Shick said. “The common rule of spending 75 per cent of your preretirement income often falls short – many people actually spend the same or more in the early years of retirement, with more time for travel, hobbies and family.”
According to Ms. Shick, the next step is determining where that income will come from. Alongside sources such as CPP, OAS or a company pension, your investment portfolio can be structured to deliver a steady stream of income, referred to here as a “paycheque-style portfolio.” The idea, she explained, is to live off the income generated from your assets and possibly drawing some of your capital. “The important last step is to create what we call a ‘stress test’ to ensure you don’t outlive your capital.”
A lot of retirees face emotional difficulties transitioning from capital accumulation to capital drawdown, “but it’s important to remember that one reason for creating capital is to use it in retirement as long as it lasts your lifetime, which is why a retirement plan is necessary,” Ms. Shick said.
The three steps as she described above are part of a fluid process. “It typically takes a few years of real-world experience to refine your spending as you settle into your new lifestyle and it is important to continue to update the plan,” she added.
In order to create retirement cash flow, Ms. Shick suggested that an investment plan should include a diversified mix of dividend-paying stocks, potentially in the form of dividend-paying ETFs or income-producing mutual funds, in addition to fixed-income assets like bonds.
“An important consideration with bond ETFs is that, while they can be effective in certain scenarios, they fluctuate in value and typically have no set maturity date, which can make them less suitable for predictable retirement income.” Individual bonds, by contrast, provide defined maturity dates and return of principal, offering more reliable cash flow, she advised.
“One important principle we always follow for our clients is cash-flow protection,” Ms. Shick said.
It’s important to ensure your cash needs are covered by your outside pension resources, income produced in the portfolio and a bond ladder (multiple bonds with staggered maturity dates) for at least three years, she said. That way, even if markets experience negative returns or volatility – as we’ve seen lately – your cash flow is not affected and it becomes similar to receiving a paycheque, which is predictable and constant, Ms. Shick added.
“This approach can provide the confidence and stability needed to transition into retirement with clarity and peace of mind.”
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