How to Build Retirement Income That Holds Up in Good and Bad Markets

When I began my career as a young advisor with Merrill Lynch in 1999, I quickly learned an important lesson about investing: market volatility can have a significant impact on retirees, especially those who retire just before a major market correction. More than 25 years later, as Portfolio Manager for the Kerrimuir portfolios with Richardson Wealth, I have come to appreciate that a successful retirement is about much more than simply building wealth. It is about creating a sustainable retirement income plan that can withstand both good and bad economic environments.

Unfortunately, I continue to see many investors enter retirement with a solid financial plan but without a properly structured income strategy. While financial planning is an essential first step, the transition from a financial plan to a retirement income plan is where many investors and professionals fall short.

Why a Financial Plan Is Not the Same as a Retirement Income Plan

Consider the example of Heather and Murray. Heather is 65 and Murray is 68, and they are preparing for retirement. The first step is to develop a comprehensive financial plan that identifies their retirement objectives, spending requirements, tax considerations, and long-term goals. At Richardson Wealth, we are fortunate to work with our Tax & Estate Planning team, which helps our clients build detailed financial plans tailored to their unique situations.

A financial plan may determine that Heather and Murray need $5,000 per month from their investments to maintain their desired lifestyle. The plan demonstrates that retirement is achievable. However, an important question remains unanswered: where will that income come from, and how will it be generated during both favourable and challenging market conditions?

This question becomes particularly important if Heather and Murray retire just before a recession or significant stock market decline. This is known as sequence of returns risk: losses early in retirement do more lasting damage than the same losses later, because withdrawals lock them in. If markets fall 20% or 30% in the early years of retirement, would they be forced to sell investments at depressed prices to fund their lifestyle? Likewise, during periods of rising inflation and higher interest rates, could they be forced to sell fixed-income holdings at a loss?

These risks are often overlooked during the retirement planning process.

What Does It Cost to Protect Retirement Income?

While financial projections frequently assume steady investment returns, actual markets do not behave in a straight line. Investors spend considerable time building retirement projections, but many fail to implement a portfolio structure designed to manage real-world market volatility. In our view, a successful retirement strategy should focus not only on growth but also on protecting income during periods of uncertainty.

Some solutions offered within the insurance industry attempt to address this issue through segregated funds and guaranteed income products. While these solutions can provide reassurance, they often come with a significant cost. Segregated funds typically carry annual fees ranging from approximately 2.50% to 3.10%, while many mutual funds fall between 1.75% and 2.50%. By comparison, Kerrimuir portfolios generally operate within a cost range of approximately 0.75% to 1.00%.

The difference may seem small, but over a retirement period of 25 years or more, higher fees can significantly reduce wealth and diminish the income available to retirees. Keeping investment costs under control is one of the few factors investors can directly influence.

Example: A Retired Couple With $1.5 Million in Savings

Let's return to Heather and Murray. Their investment assets consist of:

• Heather's TFSA: $150,000
• Murray's TFSA: $150,000
• Joint Non-Registered Account: $400,000
• Murray's RRIF: $800,000
• Debt: $0

Together, they have accumulated $1.5 million in savings. Their financial plan indicates they require $60,000 annually, or $5,000 per month, from their portfolio.

In What Order Should Retirees Withdraw From Their Accounts?

The next step is determining how those withdrawals should be funded.

In our view, asset location is an important part of retirement planning. Generally, withdrawals should be sourced in the following order:

1. Non-Registered Accounts
2. RRSPs and RRIFs
3. TFSAs

Note: The asset location hierarchy discussed above should be viewed as a general guideline. In practice, the optimal withdrawal strategy will depend on each investor's unique tax circumstances. Please refer to our article on Investments & Taxes, where we discuss how analyzing personal marginal tax brackets can help optimize withdrawal decisions and maximize tax-efficient retirement income.

How Much Cash Should Retirees Keep in Reserve?

Equally important is asset allocation. We believe retirement income planning should begin by establishing a reserve of liquid assets. For clients withdrawing monthly income, maintaining two to three years of anticipated withdrawals in cash, money market funds, short-term bonds, or GICs can provide valuable protection during market downturns.

For Heather and Murray, three years of withdrawals equals approximately $180,000 ($5,000 × 12 months × 3 years). Within a $1.5 million portfolio, this would represent roughly 12% to 15% of total assets. This reserve helps ensure they can continue drawing income without being forced to sell long-term investments during difficult market conditions.

Fixed income also plays an important role in a retirement portfolio. However, investors need to understand the risks associated with traditional bond funds and bond ETFs. Many fixed-income investments can decline in value when interest rates rise, particularly those with longer durations. During inflationary environments, rising interest rates can create unexpected losses for conservative investors.

How Bond Ladders Reduce Interest Rate Risk

One solution we implement within Kerrimuir portfolios is the use of bond ladders. By purchasing individual bonds and GICs and holding them to maturity, investors know exactly when their principal will be returned. As securities mature, proceeds can be reinvested at current interest rates. This approach can help reduce interest rate risk and provide greater predictability for retirement income planning.

Why Retirees Still Need Equities and Regular Rebalancing

While conservative investments provide stability, retirees must also maintain exposure to growth-oriented assets. Retirement can easily last 25 to 30 years, meaning inflation remains a significant threat to purchasing power. Equities play an important role in helping portfolios grow and maintain long-term value.

The key is balancing growth with risk management. One area that is often overlooked is portfolio rebalancing. If equity markets generate strong returns, investors should consider harvesting a portion of those gains and reallocating funds to conservative investments. For example, if markets rise 15% or more in a given year, selling some appreciated holdings and replenishing cash reserves can strengthen the retirement income strategy and reduce portfolio risk.

The Role of Commodities in a Retirement Portfolio

Another asset class that deserves greater attention is commodities. Commodities often exhibit lower correlation to traditional stock and bond markets and can provide valuable diversification benefits. They may also perform well during inflationary environments, helping offset weakness in other asset classes.

As with equities, disciplined rebalancing is essential. If commodities experience substantial gains, investors should consider locking in some profits and reallocating capital to other areas of the portfolio. This disciplined approach helps maintain target asset allocations and supports long-term retirement objectives.

How the Kerrimuir Global Tactical Index Portfolio Is Structured

Our Kerrimuir Global Tactical Index Portfolio is structured as follows:

• 10% Cash
• 25% Fixed Income (low duration, held to maturity)
• 55% Equities
• 10% Commodities
• Included within commodities is a 1% to 2% allocation to Bitcoin

This balanced approach seeks to provide growth, income, diversification, and protection against inflation while maintaining the flexibility required throughout retirement.

What Makes a Retirement Income Plan Hold Up in Any Market?

In conclusion, a successful retirement requires more than simply creating a financial plan. Investors also need a well-designed retirement income strategy that can navigate both favourable and challenging economic conditions. By combining tax-efficient asset location, adequate cash reserves, carefully structured fixed-income investments, long-term equity exposure, and ongoing portfolio rebalancing, retirees can improve their chances of maintaining a comfortable lifestyle throughout retirement. In our experience, thoughtful portfolio construction and lower investment costs can play a critical role in helping investors preserve their wealth and avoid the risk of outliving their savings.

---

Questions You May Be Asking

What is sequence of returns risk?

Sequence of returns risk is the danger that markets fall early in retirement, while regular withdrawals are being taken. Selling investments at depressed prices to fund income locks in losses and leaves less capital to recover.

How much cash should retirees keep for income?

We generally suggest two to three years of planned withdrawals in cash, money market funds, short-term bonds or GICs. For a couple drawing $60,000 a year, that is $120,000 to $180,000.

In what order should retirees withdraw from their accounts?

As a general guideline, withdrawals come first from non-registered accounts, then RRSPs and RRIFs, then TFSAs. RRIF minimum withdrawals are required every year regardless, and the best order depends on each person's tax brackets.

What is a bond ladder?

A bond ladder is a set of individual bonds or GICs that mature in successive years. Holding each to maturity returns principal on a known date, which reduces the effect of rising interest rates on retirement income.

Why do retirees still need equities?

Retirement can last 25 to 30 years, and inflation steadily reduces purchasing power over that time. Equities provide the long-term growth needed to help income keep pace.

---

See How the Kerrimuir Portfolios Are Built

Every retirement income plan starts with the right portfolio structure. Our fact sheets set out the objectives, asset allocation and construction approach of each Kerrimuir portfolio, including the Global Tactical Index.

Download the Kerrimuir fact sheets or contact our team to talk through how your retirement savings could be structured for both good and bad markets.