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The Sequence of Returns

While the above title may seem mysterious it merely brings attention to the effect of when and how you draw down your retirement cash flow from your invested assets in conjunction with the performance and mix of your retirement assets. The goal for these assets after all is to provide you and your spouse with a steady and sufficient income every month for as long as you both live. 

In general, we aim for and value the serenity that comes from seeing our retirement assets grow for some years and despite our monthly withdrawals are able to continue the payouts we need to meet retirement expenses during our entire lifetime. We also like to have our retirement income stay abreast of inflation. To achieve that goal some portion of the invested assets must hold equities. Since these assets are volatile, however it is wise to hold a substantial portion of retirement assets in bonds or even cash. While the bonds or cash reduce exposure to volatility they also reduce the growth rate of the assets which can result in insufficient assets to provide the monthly cash flow at the required monthly amount in later years. 

The challenge therefore is to have steady growth in your retirement assets at least in the early years of retirement so that in the later years your total retirement assets are sufficient to keep generating an inflation-adjusted cash flow. For example, minimum RIF payments are mandatory and rise slightly each calendar year based on your age. Most Canadians postpone any RIF withdrawals as long as possible which is the end of the year they reach age 71. Therefore, their minimum withdrawals start at 5.28% of the RIF total value beginning January 1 of the following year and reach 10.99% when they are age 89, and continue to rise annually thereafter. To preserve the RIF capital you will want to avoid any excess withdrawals from your RIF assets and instead find other investments from which you can make any additional withdrawals as needed after your RIF payments begin. 

Here are some steps you can take to smooth out the effect of withdrawals when the markets produce negative returns:

.budget for the extra expenses of the early years and avoid paying for those years by making withdrawals from retirement assets 

.have a portfolio for retirement assets that holds at least a 40% equity component at all times 

.do not react to market volatility by changing your portfolio mix: over time these volatile periods are always outperformed by steady increases in equity markets and since no one can predict when the recovery begins you should stay calm during volatile periods and stay invested 

· your advisor should be reaching out to you to discuss market volatility and you will want to listen to his or her advice about the context of the volatility, that it is a common feature of the capital markets which should not cause you to reverse course. To switch out of equities simply raises the second question: "When do I get back in?" because being in the equity markets is the best plan to have retirement assets last for a long time. A retirement portfolio of cash and bonds will not grow enough to last over time. 

. where possible, maintain savings beyond retirement assets as a fall back when volatility impacts your retirement assets. There will be times when your cash flow from retirement assets exceeds your expenses and that is when you can invest in your non-retirement assets so that you can hold non-RIF assets when the RIF payouts are declining simply due to annually rising minimum withdrawals. 

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