How to Budget for 30 Years of Retirement Without Running Out

Today’s retirees looking to leave the labour force in their mid-60s can expect to budget for around three decades. Of course, 90 might be the new 80 for some, especially if new AI-driven health innovations lead to some years of life expectancy gain at some point in the future! Of course, for many, running out of money in the middle of retirement is a bigger fear than running out of time. In any case, there’s also that “wild card” of UBI to think about, especially if AI does impact the labour market drastically in the 2030s. Either way, I’d say it’s far too early in the game to expect any of those cheques to start flowing in!

And while there are ample instruments and strategies to reduce the risks of coming up short while you’re in your 80s or even 90s, I think that playing it cautiously and not over-reaching for yield are wise moves. Of course, it’s not all about the investment side; some spending changes are to be expected along the way. Indeed, perhaps my favourite way to budget for a lengthy, multi-decade retirement is to pivot when the time comes.

So, if you’re going by a 2-4% withdrawal rule alongside your other sources of income (let’s say rental income, interest, dividends from stocks, and distributions from real estate investment trusts, or REITs, and royalty funds), it might make sense to maybe consider putting off that vacation or nice-to-have experiential purchase when the markets are down so that you can avoid selling stocks to fund your retirement when they’re down.

Striking the right balance between saving and investing

Arguably, cutting lifestyle expenses in a way such that you have enough financial flexibility to add to market positions when they’re down could be a wise move that helps you increase the longevity or even growth prospects of your retirement nest egg. Either way, how much one pulls the spending lever versus the investment portfolio (think yield) lever will differ for everyone based on their risk tolerance, their longevity expectations, and, of course, spending habits. There’s also the matter of how much you want to leave behind for loved ones.

Either way, there are plenty of tools, from low-to-no-risk investments, including bond funds, to annuities, money market funds, T-bills, bond proxy-like dividend-paying stocks (think low-beta defensive dividend payers), as well as specialty income exchange-traded funds (ETFs) that own the underlying stocks but add a layer of active, like options-based strategies to boost the yield.

Of course, there’s no perfect mix for everyone. Some wealthier retirees with fatter nest eggs might be able to spend more while going for lower-yielding stocks, some of which could help them actually grow their wealth in retirement. Indeed, if a 1% yield is good enough to get the income you need and you want to leave behind a legacy, I’d say it might make sense to incorporate a bit of growth names (preferably dividend growth stocks) in there as well.

Either way, the key is to make sure the math makes sense. And targeting a yield or portfolio withdrawal that’s in your “sweet spot.” For some, the yield is 4%, for others, it might be closer to 1%. And, of course, for risk-takers, 5% or even 6%-yield REITs could make sense to own as well.

Vanguard FTSE Canadian High Dividend Yield Index ETF

Personally, I’m a big fan of Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY), as it’s a low-cost ETF with a 3.55% yield and a preference for proven large-caps. Over the long run, the VDY has shone bright, all while offering a fatter yield than the TSX Index.

What’s more is the recent outperformance, with the VDY down just over 3% while the TSX Index is pretty much in a correction, down around 10% from its peak. Given how impactful dividends are on total returns over the long haul, I’d say the VDY is a must-consider for prospective retirees who want not only yield from equities, but dividend-growth prospects over time. With a heavy weighting in pipelines and banks (as well as insurers), you’re getting some serious long-term dividend appreciation runway, at least in my view, relative to the broader TSX Index.

The post How to Budget for 30 Years of Retirement Without Running Out appeared first on The Motley Fool Canada.

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More reading

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Fool contributor Joey Frenette owns shares of the Vanguard FTSE Canadian High Dividend Yield Index ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.