What if you could live off the interest from your investments without ever touching your principal? For many people going into retirement that sounds like the ideal plan. The peace of mind of knowing your original capital is always intact can be appealing, especially with GIC rates higher than they have been in years.
But there is a catch.
Let me walk you through a recent example that shows why this approach can be more dangerous than it appears.
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Tom’s Retirement Plan
Tom, is a recent retiary and had saved $1 million and wanted to draw $40,000 per year from his portfolio. His local credit union was offering a GIC paying 4 percent annually, which seemed perfect. That 4 percent interest would give him exactly the $40,000 he needed, and his capital would remain untouched.
No volatility. No losses. No stress. Or so it seemed.
The Problem: Inflation
Tom’s plan did not account for one major risk: inflation.
Let’s assume the 4 percent GIC rate holds steady throughout his retirement, and that inflation stays at 3.1 percent. While his income remains flat at $40,000, the cost of living continues to rise. After just one year, he would need $41,250 to maintain the same purchasing power. In 10 years, he would need over $54,000. After 20 years, the number jumps to more than $77,000.
His income would stay the same. His expenses would not.
To keep up, Tom would eventually have to start spending his principal, something he hoped to avoid.
The Hidden Risk of Playing It Too Safe
Tom thought he was avoiding risk by moving into guaranteed investments. But he was trading market risk for a different kind of risk: the erosion of his purchasing power.
In trying to eliminate short-term fluctuations, Tom introduced the long-term risk of not being able to afford the same lifestyle in the future.
A Better Way: Grow Income, Not Just Preserve Capital
When we talked further, I explained that while it makes sense to become more conservative in retirement, it does not mean you should stop investing altogether. The goal is not just to avoid loss, it is to grow your income over time.
We looked back to 2013 and ran the numbers on a moderate portfolio with 60 percent in stocks and 40 percent in fixed income. If Tom had used that strategy, withdrawn $40,000 per year, and increased that amount annually by 3.1 percent to match inflation, his portfolio today would be worth over $1.25 million.
Yes, there would have been ups and downs. His worst year in that portfolio would have been a 7.5 percent loss. But over time, the market growth outpaced inflation and gave him the flexibility to increase income without eroding principal.
Final Thoughts
The desire to preserve your savings is natural, but staying too conservative in retirement can cost you more than a market dip. It can quietly erode your purchasing power and limit your lifestyle.
A better strategy may be one that balances income stability with long-term growth potential.
If you are not sure what that looks like for you, visit our website and book an appointment with us.
