When it comes to investing, much of the focus tends to be on the accumulation phase (when you’re growing your savings). However, the decumulation phase — using your investments to generate income — is just as critical, if not more so.
After all, investment income can help you live the lifestyle you’ve worked hard to create, allow you to pay for any unexpected expense, provide you with a comfortable retirement and ensure that you can leave a lasting legacy for your family.
By integrating your investment income into your financial plan, you’ll create a tailored approach that evolves with your goals, timelines and circumstances.
Why you should align investment income with your financial plan
Your financial plan should be as unique as you are, with separate goals for your income, spending, retirement and legacy. Whether you’re in the accumulation phase, close to retirement or already retired, managing investment income helps ensure your financial resources meet your lifestyle and long-term objectives.
Proper alignment is not just about the amount of income, but the timing and flexibility of that income. Key questions that shape how investment income should fit into your financial plan include:
- Do you need income now or can you let your investments grow?
- Will you have enough liquid assets to handle both planned and unexpected expenses?
- How will your income needs evolve as you move through different life stages?
The answers to these questions will help frame your financial decisions, leading to better outcomes over time.
Liquidity needs: balancing cash flow and flexibility
Liquidity refers to how quickly and easily you can convert your assets into cash. While generating income from your investments is critical, having access to liquid funds is equally important, particularly when unexpected expenses arise.
Why liquidity matters:
- Emergency expenses: you never know when you might face medical costs, home repairs or other surprise expenditures.
- Opportunity costs: sometimes, market opportunities or life changes require quick access to cash, and having insufficient liquid investments could limit your ability to take advantage of them in a timely manner.
- Avoiding forced selling: you don’t want to be in a position where you need to sell investments at a bad time, for example during a market downturn, just to cover expenses.
A well-structured financial plan balances income-producing assets with liquid ones, like cash, short-term bonds or other easily accessible investments. Liquidity planning ensures that you can cover immediate needs without disrupting your long-term investment strategy.
Retirement timelines: aligning income with life phases
One of the most critical components of aligning investment income with your financial plan is ensuring your assets can provide for you during retirement. Your retirement timeline plays a huge role in how you structure investment income. Whether you plan to retire early, work part-time in retirement or follow a traditional timeline, understanding how your income needs will change over time is crucial.
Early retirement planning:
- Higher income needs earlier: if you retire early, you’ll likely need higher income from your investments in the first few years, especially before pensions or government benefits like Old Age Security or the Canada Pension Plan kick in.
- Avoiding drawdowns: drawing down your assets too aggressively in early retirement can increase the risk of running out of money later; this is called sequence of returns risk. An investment income strategy tailored to your timeline will help avoid this.
Traditional retirement:
- Income stability: for those retiring at traditional ages (for example, the mid-60s), the focus is often on maintaining steady income streams to cover living expenses, health care and lifestyle needs.
- Mixing income sources: income may come from a combination of investments, pensions, annuities and government benefits, so your investment plan should complement these income streams.
Later retirement planning:
- Increased health care costs: as people age, health care costs tend to rise, and it’s important to plan for these additional expenses. Planning for increased liquidity in later years can help manage these costs.
- Income longevity: in later retirement stages, ensuring that income lasts as long as you do is crucial. This requires a balance between being conservative while still having enough growth potential in your portfolio to ensure that your money lasts.
Estate planning: preserving wealth for future generations
Estate planning goes hand-in-hand with income planning, especially for those who want to leave a financial legacy for their heirs or their favourite charities. When structuring your investment income, it’s important to balance your immediate income needs with the goal of preserving or growing your wealth over time.
Tax-efficient income strategies:
- Tax-sheltered accounts: government-registered plans, such as RRSPs and TFSAs, can help ensure that you leave a larger estate. Drawing from taxable accounts first, while delaying withdrawals from tax-sheltered accounts, can maximize the after-tax value of your estate.
Balancing income and legacy:
- While generating income for your own use is a priority, it’s also important to think about how much of your wealth you want to leave behind. A well-structured estate plan can work in tandem with your investment strategy, allowing you to enjoy your wealth while also providing for loved ones.
Creating an adaptable income plan
A successful income strategy should be dynamic and evolve alongside your personal situation and external factors, like market conditions and tax laws. Some tips for keeping your investment income strategy flexible include:
- Revisiting your plan regularly: as your circumstances change — whether due to job changes, family needs or market conditions — it’s important to re-examine your income strategy with your financial advisor.
- Diversifying income streams: relying on a mix of income-producing assets, such as dividend-paying stocks, bonds and real estate, can help ensure that your income remains stable even when markets fluctuate.
- Incorporating guaranteed income: in some cases, you may want to incorporate products like annuities, which provide guaranteed income and can help mitigate longevity risk (when you outlive your savings).
Working with a financial advisor
Navigating investment income and aligning it with your financial plan is not a one-size-fits-all solution. Your financial advisor plays a key role in creating and updating a customized income strategy that reflects your goals, risk tolerance and timeline. They can help you:
- Identify appropriate income-producing investments.
- Structure a withdrawal plan that balances current needs with future growth.
- Develop strategies to minimize taxes on your investment income.
- Plan for life’s uncertainties, including market volatility, health changes and evolving family needs.
By working closely with an IG Advisor, you can create an income plan that serves your present needs while securing your financial future. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Advisor.
Commissions, fees and expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated. Mutual funds and investment products and services are offered through Investors Group Financial Services Inc. (in Québec, a Financial Services firm). And Additional investment products and brokerage services are offered through Investors Group Securities Inc. (in Québec, a firm in Financial Planning). Investors Group Securities Inc. is a member of the Canadian Investor Protection Fund.
