The best way to create retirement income

For most investors, some of the most crucial financial decisions come toward the end of their lives. Not only do you have to determine when to retire, but you have to find a means to pay for it without depleting your savings too soon.

Up until a few years ago, that meant a portfolio of blue chip stocks supported by a ladder of GICs where as much as two-thirds of your nest egg was divided equally into terms of one through five years.

Every year, you'd roll your maturing money into a new five-year certificate. If interest rates were to climb, you'd still have a chance to buy in. If rates fell, your exposure was limited.

Well, fall they did, sending many otherwise conservative retirees on a wider hunt for other guaranteed income sources from, say, government bonds.

That, boosted by some capital gains as rates fell, worked for awhile but the yield on five-year Government of Canada Bonds was just 1.35 per cent recently. And 10-year-bonds aren’t that much higher.

So, what to do?

Instead of simply locking in assets this way and using interest payments and periodic withdrawals to create some income, researchers such as York University professor Moshe Milevsky have suggested that retirees might be better off allocating their money among a broader variety of retirement-income options.

Milevsky recommends placing your assets into distinct categories, or silos, each with unique features and guarantees designed to take the edge off the worrisome issues you’re likely to face in retirement.  

It’s quite a long list of worries.

It includes, for instance, watching inflation nibble at your money, losing too much too early in a "down" market without the time to make it up, paying a whack of taxes, leaving a legacy or simply living longer than you bargained for.

Recently, Wade Pfau, an economics professor at the National Graduate Institute for Policy Studies in Japan, tried to build a comparative framework to help those grappling with these decisions.

Over and above simply putting your money in the bank, he looked at using stocks, bonds, annuities (both straight life and indexed), as well as managed programs that come equipped with guaranteed lifetime withdrawal benefit (GLWB) riders to fund those later years.

When you sign up for an annuity, you give an insurance company a chunk of money and it agrees to send you a monthly cheque for a certain period of time or for the rest of your life, no matter how long you live. For a slight cost, you can also add inflation protection to the mix.