Lacking consensus on retirement withdrawal strategies

If you think you’re confused about how best to accumulate assets for your financial future you haven’t seen anything yet.  This is my takeaway from reading a recent Globe and Mail article about “decumulating” wealth.

Academic research seems to show that withdrawing 4% of your portfolio every year, and increasing your withdrawals with the rate of inflation, will ensure you not only have enough income to cover expenses but you likely won’t outlive your money either over a 30-year retirement span.  This of course assumes you’ve saved “enough money” for retirement in the first place to cover expenses.  I’ve estimated what our retirement number might be and here it is.

William Bengen, a financial planner with a background in aeronautical engineering, was the father of the 4% rule – stress-testing over decades what a safe withdrawal rate might be. His conclusion:

to weather any sort of market storm that includes a Great Depression or a Great Recession retirees should withdraw no more than 4% of their portfolio in any given year.

This seems appropriate so I have little issue with the 4% rule.  I suspect aspiring retirees however might have to account for various headwinds in the coming decade though.  Rising healthcare costs, lower portfolio growth and cuts to various government programs top the list of my future expectations.  This means when it comes to our portfolio planning we’ll want some extra buffer to avoid spending less or simply working longer to meet our financial obligations.

Choosing a retirement income strategy is not easy but I’m confident a mix of fixed-income, available cash savings and owning dividend-producing securities with growth-oriented ETFs is the way to go for us.  This means we’ll employ a modified cash wedge approach, something like the following:

  • Treat any income from our pensions like it is: fixed-income and ensure this allocation is about 30-40% of our total portfolio. Use the fixed-income for living expenses.
  • Keep about one-year worth of living expenses in cash savings in case the market goes haywire.
  • After the one-year cash fund is established split the portfolio this way for retirement income:
    • 50% invested in dividend-paying stocks from Canada and the U.S. (about 30-40 stocks in total) and use the dividend income generated from these investments for living expenses, and
    • 50% invested in a couple of low-cost, diversified, equity ETFs that invest in thousands of stocks from around the world. We will spend the distributions from these investments and keep the capital intact to use as we please.

The 4% rule is a nice safety-first approach but an even more conservative approach is living off your dividends or distributions.  This should ensure we can weather horrible and prolonged market downturns but also have more freedom to spend the capital at our leisure.  Each retiree is unique and needs a plan that is tailored to their needs.  While academics should be proud of the 4% rule it’s far from what you might need for your retirement spending patterns.  Figuring out how to build wealth is difficult enough these days but I suspect how to spend your wealth in retirement and keep it for as long as necessary brings the lack of consensus on retirement withdrawal strategies to an entirely different level.

As a retiree – how did you come up with your retirement income approach?  

As you plan your retirement – what’s your income game plan?  

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132 Responses to "Lacking consensus on retirement withdrawal strategies"

  1. Another great post and of special interest to me as I am 56, recently retired and considering different options for living off my investments. Perhaps you could do a future post on drawing down income from various accounts. For example, my investments are Vanguard and BMO ETF’s held in a 4 accounts – cash, TFSA, RRSP and a LIRA invested as follows:
    55% bonds ($386K), cash ($60K) and preferred shares ($58K)
    45% equities – 34% ($122K) allocated to Canadian equity
    66% ($247K) allocated to “all world equity”

    What is the best way to draw down my investments to fund my retirement?
    Should I move 50% of my LIRA into my RRSP?
    Should I then draw down the remaining 50% remaining in the LIRA?
    Should I put it all in a RIF now?

    Reply
    1. Thanks Marko. Every investor is different and kudos to you for such a great portfolio ready to live from…

      Based on some preliminary thoughts…it would make sense to keep your TFSA “until the end”. This is our plan at least. This means we will likely wind down our registered accounts now before collecting any CPP and OAS, the latter for you, age 65; it will be age 67 for me, or higher, depending upon what our government decides in the future 🙂

      My understanding about LIRAs is you can “unlock” 50% of it, depending upon jurisdiction, transfer 50% assets to an RRSP where there is no restrictions on withdrawal other than taxation. This can only occur at the time when you are moving money from a LIRA to a LIF or annuity product. I would be inclined to do that, to simplify things across multiple accounts. Then I would then consider withdrawals from reminder of LIRA/LIF for expenses, killing that account first and winding down RRSP next.

      I wrote about my own plan for the LIF here:
      http://www.myownadvisor.ca/lif-income-strategies/

      I think depending how much cash you need from your RRSP will determine if you want to convert your RRSP to a RIF now. The withholding taxes on RRSP withdrawals are quite high over $5,000 per year.

      Reply
  2. I plan to live off dividend income in retirement.. A large portion of portfolio is in individual stocks (exception is funds that i have in 401(k) – i think Canadian equivalent is RRSP)… One day I will probably earn social security ( old age security equivalent in Canada). But there are several decades ahead, so who knows what will happen.

    Unfortunately I have never been eligible for a pension.

    If I have have a dividend portfolio yielding 3% – 4% that produces enough income for me to live off (equivalent to having 25 – 33 times annual expenses saved), then I am good to go. At some point bonds will be added depending on valuation and personal opportunity cost. I do view Social Security as a form of fixed income allocation.

    Reply
    1. You might already know DGI, we also hope to use dividend income in retirement to the tune of about $30k per year. We figure a retirement portfolio of $1M should do it nicely.
      http://www.myownadvisor.ca/dividends/

      We’re 1/3rd of the way there so I figure we have 10-15 years of savings to go to reach this goal.

      Correct, the 401(k) is the Canadian equivalent to the RRSP, tax-deferred account. About half of our invested assets are inside the RRSP. I hope to grow our tax-free assets predominantly going-forward.

      We’ll also add some bonds depending on valuation and personal opportunity cost but not right now. Always appreciate your comments.

      Reply
  3. Thanks for the tips Mark. I actually got the LIRA information from your post on that subject. It certainly didn’t come from the TD Wealth Management financial adviser (or a previous DFA based adviser) that had been skimming 1.47% ($1000 per month) off my investments with little or no benefit to me 🙁

    I’m happy to now be in the DIY Index ETF model and saving myself those monthly management fees. It’s blogs like yours that helped me make the jump 🙂 Now I will find a fee based adviser that I will pay for tax advice.

    Reply
    1. LOL re: TD Wealth Management. The brokerages are in business to make money for sure Marko. At least I’m a TD shareholder!

      If you’re indexing quite a bit then good on you, keeping more of your money and doing more with it as you please. That’s the life. I hope to “be there” with some great passive income to live from in another 15 years in my early to mid-50s. We believe we’re on a good track. We just need more time in the market and a bit more savings – like maxing out the TFSA for the next 15 years.

      Good call on a fee-based advisor for tax advice or an accountant that specializes in taxation.

      Reply
  4. Great post Mark. We have been retired for 9 years now and we haven’t been able to stick to just taking to dividends and interest on our investments each year. There is always something that throws a wrench into our plan; this year for example we changed vehicles. In past years it has been cruises etc. It is expensive to take large sums out of RIF’s so the vehicle was paid for out of TFSA. We’ll see how that works out. (The new vehicle has cut our fuel bill in half so there are some positives!) Just passing on our experiences.

    Reply
    1. You haven’t stuck to “just taking to dividends and interest” each year, with changing vehicles and take cruises (with an “s”); that’s a great problem to have in retirement Gary. Sounds like you are doing very well. Kudos…
      Mark

      Reply
  5. Excellent subject Mark. As a more recent retiree I am very interested in reading about different methods of funds/cash flow for a fulfilling and sustainable retirement. Your links were very interesting.

    As of now I do not have a specific plan for how we are going to withdraw or use funds in our accounts. However I am currently following an actuarial approach that uses our end of year asset balance, forecasts a conservative investment return forward, and adjusts our withdrawal amount annually at the start of the year. I really like this fluid and much more active approach since to me it is much more accurate and safe than most other methods, and since we do not want to live on dividends only. A good chunk of our spend money is discretionary and we are very flexible on our “wants’ so this approach seems to suit us perfectly, along with a balanced asset allocation, whether in good or bad times. It will be interesting to see if this approach still works for us in the years to come.

    In our first year we used cash from a HISA and can probably do this for another year+ and still stay within my targeted asset allocation IP guidelines. There is also another RE asset that may impact us positively this year and delay the need for any other withdrawals for another couple of years, so some moving parts to be considered.

    Generally I want to deplete my LIRA and RRSP first; and will probably transfer 50% of LIRA to my RRSP and start withdrawals as LIF, and/or from my RRSP based on investment type in order to maintain our desired asset allocation. Since these accounts are a large part of our assets I don’t see tapping into our non registered and finally our TFSA’s for decades, unless market returns are very low or negative for longer periods. Withdrawing these funds in an orderly and timely fashion is also important to us to help avoid or minimize OAS clawback, and reduce the base before CPP starts. I also hope to top up, or at least partly contribute to our TFSA’s from registered as rules and our cash flows allow.

    Reply
    1. Your approach seems very sound and disciplined Deane. Although you have no specific plan for how you are going to withdraw or use your funds, you have a plan and it seems very flexible – since you have the luxury many retirees are looking for: “a good chunk” of your money can be spent on discretionary vs. essential items. We hope to be there someday 🙂

      I also intend to deplete my LIRA first, potentially unlocking it or simply converting all of it to a LIF as early as possible (age 55 for me). I should be able to wind down the LIF before age 60. I intend to use the RRSP next, keeping the non-registered assets and TFSA respectively “until the very end”. I suspect our RRSP will be gone by age 60 or 65 at the latest with monies spent or moved completely what we don’t spend to the TFSA. Time will tell for us! Thanks for the detailed comments Deane. I continue to learn from successful retirees like yourself.

      Reply
  6. You are welcome Mark.

    I’ve also tried to keep the return assumptions very conservative to give us more flexibility and possible upside. This was a mistake I made in much of the accumulation phase-being too aggressive with return assumptions, ending up with a nest egg that was “enough” but much less than we hoped/planned for.

    I think many of us are learning from each other on here.There are certainly some good role models and savvy investors posting on here. As for successful, let’s keep the fingers crossed the results are at least close to the plans.

    I’ve done numerous calculations on withdrawal scenarios etc but I think these are always going to be a moving target and work in progress. I’m good with that right now, and enjoying retirement and this financial side.

    Your plan sounds very solid. The order of spend should be the same as mine and what many others seem to be planning as well.
    I’m certain you will “be there someday”, and that someday will be sooner than you think.

    Cheers

    Reply
    1. I think that’s the great thing about blogs and forums in general Deane, we can all learn from each other, even something about ourselves, if we’re to listen and hear others out a bit. I know I’m learning more about myself the more I run this site.

      I can appreciate the wind-down is a moving target as needs and wants change – I think that certainly adds to the complexity which to me makes predicable cash flow via dividends or distributions even more valuable than focusing on capital appreciation.

      Thanks for the feedback on the plan and we’ll keep enjoying today while working for our “someday” 🙂

      Reply
  7. Would also be wise to forget the ‘4% Rule’ as a rule of thumb, as it has been soundly disproved. Time to start using the other thumb.

    Wade Pfau’s blog is a solid place to start with reprogramming retirement thinking.
    Might also read ‘The Real Retirement’ (Canadian-centric) by Vettese & Morneau.

    Reply
    1. Good to hear from you SST. What about a 3% rule? Personally I’m not focused on any retirement withdrawal rule now – just focused on asset accumulation now and killing debt. A simple one-two punch that should put us in a good place in another 10-15 years.

      I have “The Real Retirement” on my reading list so thanks for the reminder!

      Reply
  8. Yes Mark, we definitely can learn a lot about own wants, needs and investing ideas & tolerances by studying and asking a lot of questions of ourselves.

    I agree dividend/distribution income is more valuable for predictable income than relying on capital appreciation, although I suspect most investors will ultimately consider both, as we are.

    In our first year predictable income generated (estimated after tax) formed over 100% of our actual spending. (We only spent approx 85% of what our plan called for and did everything we wanted, traveling for 4.5 months of the year etc.) However over time this predictable income percentage will decline as much of it will not match inflation, until govt pensions kick in to rebuild the base complete with indexing. If we had spent up to our forecasted plan in the first year, equity capital appreciation needed to be approximately .33%, which was exceeded. Going forward I estimate capital growth will need to be about 1% overall to meet our objective of 3.5% total return. In this regard I feel our plan is conservative regarding both capital growth and predictable income.

    So far I’m seeing little complexity in drawing funds, with a mix of assets generating income, and cash wedge. The complexity is mostly with the administering of the investments to maintain our target allocation, and also figuring this out between 7 accounts, while considering tax…. I guess this is the price of a balanced approach and a few assets.

    Reply
    1. If you only need a total return of about 3.5%, you’re in a great place Deane. For an investment perspective it usually only makes sense to take on as much risk as you need to, to meet your objectives, so in your case, you have a modest FI component for capital preservation.

      I can foresee some challenges when it comes to the wind down for us which I believe will be an excellent problem to have. It means we have used a variety of accounts to meet our savings goals and we have tax issues. Compared to the alternatives I’m a big fan of some modest tax issues in retirement!

      Reply
  9. Always remember that a 4% steady withdrawal rate does not apply to your RRSP or LIRA except if you convert to a RIF when you are 65 yrs of wisdom. Withdrawal rates are mandated by the government, increasing every year. At 65 they are 4%
    You can only establish your own withdrawal rate from your TFSA and any other un-registered accounts you have (bonds, GICs, stocks, etc)
    I plan to run down my non-registered account leaving the RRSP to accumulate dividends and hopefully capital appreciation until I am 71 at which time I am obliged to convert the registered funds to either a RIF or an annuity. If the RIF generates more money than I require at that time, because of the mandated withdrawal rate, I will hopefully be able to keep funneling money in to the TFSA

    Reply
    1. Interesting point Ricardo about the withdrawal rate and tax-deferred accounts. I’ve always assumed (myself, for our plan I guess) this rate applies after the government loan (RRSP-generated loan) and taxation is taken into account; meaning the money leftover that actually belongs to us.

      I’m curious about your approach to keep tax-deferred accounts intact until you absolutely must collapse them. Sounds like a good plan as long as your tax rate is not increased over an approach to take an earlier withdrawal of funds. Certainly a great call on funneling excess funds not expended to your TFSA.

      Reply
  10. Thanks again Mark.

    It will certainly take planning and knowledge to draw income and wind down assets prudently over time. As to our FI component we’re currently sitting at about 50% including HISA so might be considered more than a modest amount, to help capital preservation. I expect to raise the equity portion over time as govt benefits kick in and we’re further into retirement, but our needs will play a large factor in this decision.

    The government mandating RRSP withdrawal rates beginning at age 71 is part of the reason I will be drawing from them and my LIRA much earlier. The other factors are size of the accounts and tax implications with growing assets inside them and wanting more control of what/how much we withdraw in future.

    I’m 100% in agreement with being happy to have some tax problems in retirement vs. the alternative. Clearly this indicates a healthy asset base/income.

    Reply
  11. Ha, I know you’d like to have me all in!

    It’s certainly tempting as we could almost certainly raise our predictable income and standard of living dramatically. But I would just would not have the same feeling of comfort.

    Reply
  12. Mark, I like the guard rail approach described in this article, as it allows you to start withdrawals at 5% with increases or decreases going forward depending on how the markets behave. It gets you through the “sequence of return” risk period in early retirement with a larger withdrawal at the time when you are younger and healthier and so more likely wanting to spend more. By about the 10 year point you could adjust the % withdrawal up with an actuarial approach as your time horizon has shortened. The problem with the 4% rule is that it’s about covering off the worst case scenario, which means all the other times you could have spent more and you end up with a large amount of money when you die.

    http://www.wsj.com/articles/a-better-way-to-tap-your-retirement-savings-1432836119

    Reply
    1. Thanks for sharing Grant. Depending on the bull or bear market of the day, we will likely withdraw more than 4% in our first year of retirement. A prolonged bear market can be disastrous to recent retirees so I’m not sure the “5% rule” would work here. I do however see the benefits of withdrawing more as your time horizon shortens.

      What do you think of the plan to save to the point whereby you can live off dividends or distributions?
      http://www.myownadvisor.ca/why-living-off-your-dividends-or-distributions-works/

      Too conservative?

      Reply
  13. re: “What about a 3% rule? Personally I’m not focused on any retirement withdrawal rule now…”

    You’re going the wrong way! (Great scene from “Planes, Trains, and Automobiles”). There have been times during the last 50 years when withdrawal rates have been as high as 10%; to calculate using a decreasing rate is literally short changing your future reality. (Even the creator of the Rule, Bengen, boosted the withdrawal rate to 4.5% — a 12.5% jump! — shortly after his original findings.)

    The reason withdrawal rate is important, and should require at least some sort of focus, is that other major factors/assumptions are based upon it, such as rate of return and size of portfolio. The majority of the professional financial advisor crowd still lazily relies on the 4% Rule (and associated assumptions) which can really mess up a retirement. Aren’t you glad you are your own advisor? 😉

    Wade Pfau — a retirement PhD — assumes a ~1.5% portfolio return for his calculations; the standard 4% Rule uses an 8% return for a 50/50 stock/bond portfolio. This will give a very wide spread of retirement capital requirements. How big would your nest egg have to be if you were withdrawing 10% on 1% returns? Also consider that your money has an ever increasing need to last more than 30 years (or not, as most seniors will be forced to continue working).

    Bottom line, yes, theoretically we will all need a vast sum of money to live out retirement in comfort. Reality, however, tells us that most will not achieve either. But all of us can, and should, take full advantage of the plethora of resources available (like free PF blogs) to structure the best retirement possible.

    Reply
    1. Hey SST,

      I’m not focused (really) on any retirement rules now because I’m in my asset accumulation years. I figure if I do this part well over the next 10-15 years, I won’t worry withdrawals very much other than the tax headaches that go with it.

      Yes, I am glad I am my own advisor 🙂

      I have the following assumptions built into my plan:
      4% real return
      Up to 3% inflation

      Based on our spending projections we’ll need a paid off home (i.e., no debt and no new debt in retirement) and invested assets of > $1M to retire on not counting workplace pensions or any government benefits. This should be “enough money” but I won’t know for sure until I run some detailed numbers into my early 50s.

      What’s your magic number SST?

      Reply
  14. Grant, I have read that WSJ article and have that approach saved on my computer, although am not currently as aggressive as that withdrawal wise.

    SST, thank you for mentioning Wade Pfau. I have not read any of Wade Pfau’s work directly (yet) but this article I had seen on CNN Money describes his nominal (after inflation) return assumption as 2.2% on 50/50 portfolio for the 3% withdrawal rate, with a 24% chance of outliving your savings. It also states this can move to 3.5% if a person is more diversified with small cap stocks, foreign stocks etc but no % probability was indicated here.

    The takeaways for me are:
    -conservative return assumptions = the new norm
    -conservative withdrawal rates = necessary
    -broad asset and geographic diversification = ideal
    -flexibility with withdrawals %’s in poor market periods = better

    Fortunately we have already incorporated all of these into practice in our retirement. Reading these key factors helps reinforce we have a sound plan and decent chance of success. Only time will tell.

    Good luck to everyone on here.

    http://time.com/money/2795168/forget-the-4-withdrawal-rule/

    Reply
  15. My magic no. is also over a million; everyone’s is!

    I approach things a bit differently, though. My household does not over-save. Due to certain life experiences, we value time immeasurably more than we do money, so we do spend (but not with debt). We work at maximizing our investment dollars rather than our employee dollars. Sure, we could do both, but we would have to get paid a tremendous amount to do so. In a sense, we aren’t waiting for traditional retirement to retire; we are already semi-retired and in a very sustainable lifestyle should full retirement ever hit — with or without attaining that magic million. We also plan to leave as little cash on the table as possible at time of death, heck, maybe even run out and live off credit cards for the last year or two — imagine all the reward points!

    Re-examine inflation. There are big chunks of CPI which will not apply to you as a retiree (e.g. housing @4% weight) and other components which will be more prominent (e.g. health care @5% weight). These prominent components usually have the highest rising costs which could push your personal inflation rate much higher than 3% (e.g. health care costs are ALWAYS rising by double digits!).

    For example, my house insurance jumped 35%, electric bill up 30%, water and gas 5%, meat up 8%, veggies up 12% (oh, the power of a home garden!). On the CPI table, “water, fuel, and electricity” (@4.5% weighting) have an average annual increase of 4.2%, or more than double that of broad inflation. Since you are now retired and spending more time at home, this means using more “water, fuel, and electricity” causing perhaps a 10% real cost increase; being mortgage-free, you can’t utilize lower rates to off-set those costs. Maybe you could take up smoking as cigarette prices enjoy low inflationary pressure (why, I’m not sure; the govt should be setting extortion level taxes on this burden to the health care system.).

    The great thing about personal finance is that there is no silver bullet (there will never be a unified theory) but the continual push for ultimate efficiency keeps providing opportunities to become more wealthy and more wise. So maybe a “lacking consensus” is a good thing.

    Reply
    1. I don’t think we over save…we definitely spend money. Thousands in travel per year actually.

      To be semi-retired is a “great place”…kudos to you.

      I got a laugh about your living off credit cards in old age 🙂

      I’ve already considered healthcare expenses as our biggest wildcard expense in retirement. I’m not as worried about water and veggies. We’re on a well and we have our own garden 🙂 Yes, personal finance is absolutely personal, which is great, because no two plans are the same yet there are some universal truths: save diligently, keep investment costs low, stay invested in the market, own more equities than bonds, etc. I think lacking consensus is a good thing, it promotes analysis and thought and reflection. I’m all for those things in life.

      Cheers!

      Reply
  16. “we value time immeasurably more that we do money” — well put SST! You can make more money but you can’t buy time. I like the idea of using credit cards for the last few years — I think I might prepare a plan if I can figure out which years are the last few! (:

    Reply
  17. Mark, bear in mind that in a bear market, the guard rail approach would put you back at 4%, and that 4% is calculated annually on a reduced portfolio amount in a bear market, so is more conservative that using the starting 4% indexed to inflation method.

    I don’t like the “live off dividends” approach for a couple of reasons.

    1. You have to save more money to get the same income. Your universe of stocks or bonds paying 4% is not large, so if you did that you’d have a poorly diversified portfolio and therefore more risk. Even if you do save more, having a dividend focused portfolio often results in not enough US and international diversification, again raising the risk of the portfolio.

    2. You end up with a large amount of capital at death which you could have spent when you were young and healthy. It doesn’t make sense for 90 year old with a life expectancy of, say 4 years, to only spend 3 or 4% of his portfolio.

    You might be interested in this article from Vanguard which compares an income vs a total return approach in retirement, and concludes a total return approach is preferable as, among other reasons, increases the longevity of the portfolio.

    https://personal.vanguard.com/pdf/s557.pdf

    Reply
    1. Regarding the “live off dividends”, I feel this approach works for me as part of a forced savings plan in my asset accumulation years. I fully realize I will spend the capital at some point.

      I’m not sure I’d have a poorly diversified portfolio per se. Say a few bank stocks, 50% VTI and 40% VCN, and one could easily yield close to 3% per year and rarely touch the capital. I do appreciate your comment about usually a CDN stock portfolio does not have enough U.S. and international assets, which is why I’m buying more those every year going forward.

      The only struggle I have now is, I guess I will buy VXC or VDU over VXUS with the exchange rate where it is…

      2. Again, I fully expect to start spending some capital in my 50s and 60s.

      I checked out the Vanguard article, thanks for that. I do disagree with this though in the article:
      “Common approaches for increasing portfolio income—and why they may be inadvisable For those investors who are not comfortable spending
      from their portfolio’s balance and/or whose portfolio cash flow is insufficient for their needs, there are three primary ways to increase income: increase their overall allocation to bonds; keep their existing bond allocation but tilt it toward high-yield bonds; or tilt their existing equity allocation toward higher-dividend paying stocks.”

      Given where bonds are now, #1, and #2 are not possible, at least I don’t think so. #3 seems like the only viable one especially given the tax efficiency of Canadian dividend paying stocks. For my RRSP, I’m taking more a total return approach and I have no bias to dividends, interest or capital gains.

      Reply
  18. A little insight into our plan, cuz why not.

    I’ve held a provincial govt contract for the last 10 years . My pay has increased 8%/yr on average (a hint on what actual inflation is). I started decreasing my work hours in tandem with my raises. I’m now at the threshold of minimum hours (30/wk) so any and all raises going forward will be bonus/banked money. One future option is to work as much as I can during the last 5 years of employment (50-55) as my pension is based on the highest earning 5 years. Or not, I don’t love my job that much! I also entered the financial sector as a private equity advisor; hours and earnings are very flexible but rewarding if I can get past all the “stuff” for which the financial sector is infamous.

    My wife retired last year at the tender age of 35. It took us about 4-6 months of honest, open, and realistic financial discussion and planning to create a viable plan (e.g. Shopaholics Anonymous). After a year off, she now does contract work (at her discretion) doing large festival planning/organizing. It’s outside her previous professional realm but she absolutely loves it and has been both successful and in-demand. Contracts are usually ~3 months and pay an equivalent of $60k/yr. We live off/invest my earnings and spend/invest her income. It’s a good life.

    I wasn’t kidding about using CCs and/or loans for the last few years. With no intent to leave an inheritance, and since the modern world now operates on debt instead of capital, I say it’s a very viable plan (start in your early 80’s). You can also take out life insurance on your parents to help fund your retirement, but that’s a bit in bad taste.

    In closing, as per the bearded beer guy, I don’t always focus on money, but when I do, it’s intense. 🙂

    Reply
    1. Thanks for the insight SST…you’re in good financial shape it appears, certainly since you’re able to cut back on the job. I hope to have such a luxury in my early 50s.

      Retired at 35? Wow, great stuff and the key is, she loves her job professional realm but she absolutely loves it and has been both successful and in-demand. Contracts are usually ~3 months and pa!

      We also have no intention of leaving an inheritance but we’ll need to capital in semi-retirement or retirement to travel as much as we’d like, ~2 months per year.

      Funny comment, re: The Most Interesting Man In The World:
      https://www.youtube.com/watch?v=U18VkI0uDxE

      The best one: “his blood smells like cologne”.

      Reply
  19. I agree with you Mark.

    At almost 56 and mostly retired I am going to use this approach from Dan Bortolotti – http://goo.gl/ery8DY

    I have a 50% FI (VAB, VSC, ZPR & ZDB ) & 50% Equity (VCN & VXC) that will generate more than enough income for me to live from.

    Reply
    1. Thanks Marko. I liked Dan’s article, it was excellent. Just not sure how I’m going to make that work for me yet. I consider my pension my FI. I have some equity ETFs as well. The equity ETFs should provide distributions so potentially in bad years, I can live off the distributions from these holdings and in the good years I can sell capital.

      Reply
  20. Some interesting links to articles on total return approach from Grant and Marko. Thanks.

    I have read the one from Dan B with the withdrawal strategy already.

    Reply
    1. For sure. It was interesting re-reading this:
      “While many retired people say they need income from their nest egg, it’s more accurate to say they need cash flow. After all, if you rely on your portfolio to cover $2,000 a month in expenses, it makes no difference whether those dollars come from dividends, interest or realized capital gains.”

      100% agree…however…

      “Granted, it would be ideal to live off just the dividends and interest from your portfolio, because if you never have to eat into your capital by selling investments, you’ll never run out of money. Unfortunately, only the wealthiest can afford to do that.”

      It makes me think that while “living off the dividends” (or distributions) is ideal this total return / withdrawal approach has been touted because the majority of investors will be unable to save enough for retirement.

      I’ll have to think about how selling the appreciating assets will work for me.

      Reply
  21. I completely agree you have a diversified portfolio with just 10% stocks and the rest indexed with VCN and VTI (except for the international piece). I was thinking more of those who have a portfolio of all dividend stocks, nearly all in Canada, a few US perhaps and no international. Still I’d want to withdraw more than just 3%, otherwise I’d have to save more.

    Actually the exchange rate doesn’t affect whether you buy a Canadian or US domiciled ETF. Eg VUN has gone up in price 20% more than VTI because of the drop in the Canadian $. So it’s the same either way. Still, I’d go with Canadian domiciled ETFs (unless in an RRSP), to avoid the hassle and cost of converting the currency. I’d also go with XEF rather than VDU as XEF included small caps whereas XEF does not. If RRSP, VXUS.

    I agree shifting to bonds now just to increase yield doesn’t work – that was the 2007 article when bond yields were around 6% – you could still own a high yield bond ETF, but that has downsides as stated in the article. Yes, shifting to dividend stocks does increase the yield, but, of course, also the risk.

    Reply
    1. Well, for disclosure, I have more dividend stocks than ETFs but I’m looking to reverse that trend over the next decade or so. I hope to have about 50% of my portfolio in stocks, and 50% in equity ETFs.

      I might have a small bond component when I retire. I will have a good one-year of expenses in cash. This is my thinking:
      http://www.myownadvisor.ca/cash-wedge-opening-investment-taps/

      So, the plan is to have 50% in XIU or VCN and some VTI and VXUS.

      Fair point, VUN has gone up in price more than VTI because of the drop in the Canadian $. I plan to use my RRSP for international holdings, hence the U.S.-listed ETFs like VTI and VXUS will go there.

      Reply
  22. Mark, I don’t think it’s so much that the total return approach is touted because most people will be unable to save enough for retirement, it’s just that there’s really no need to just live off the distributions when you can use a total return approach. In today’s yield environment, if you only live off the dividends, then, yes, you do need to save more. Total return means you are not left with a ton of money at death and you don’t need to save as much.

    I agree Dan’s article is excellent. The total return approach does take a bit of thinking about to get your head around, as you have to consider liquidity (you don’t want to forced to sell stocks or bonds when they are down in price) and you have to consider forced RRSP withdrawals etc. The 5 year GIC ladder is a good way of dealing with these issues. Then, of course, there’s which accounts, RRSP, TFSA, taxable, to drawn down first and next. Lots to consider!

    Reply
    1. This is starting to make more sense…I guess I read Dan’s article differently…re:

      “Granted, it would be ideal to live off just the dividends and interest from your portfolio, because if you never have to eat into your capital by selling investments, you’ll never run out of money. Unfortunately, only the wealthiest can afford to do that.”

      I see this is a goal but something I can change once I retire. If I don’t save enough, I’m forced to withdraw capital. When you save enough money, you can decide what to withdraw and when and for what. I want to be in this position, not the former – this is why I focus on the living off your dividends piece so much. It almost assures us we have “enough money”.

      It’s going to take more thought on my part to sell stocks or bonds when they are priced high in the total return approach. I guess this is why the GIC ladder is part of the equation…?

      Reply
  23. I also agree Dan’s article was excellent. I also agree 100% with and use this approach into our 2nd year of retirement. The withdrawal part is more complicated than the example due to more accounts and more investment involved, as I mentioned in my post above. However this can be managed and can work very well, as we have found.

    I also agree the total return approach isn’t so much about not having enough saved but more about an easier way to manage an overall diversified portfolio. In my case the first year withdrawal rate % was less than distributions/interest.

    Dan says it best here “Bottom line, when you focus on total return instead of yield, it’s easier to build a more broadly diversified, tax-efficient portfolio that balances growth and safety. And once you understand how to manage that portfolio in retirement, you can reliably generate the cash flow you need to meet your monthly expenses” This is precisely what I am after- safety, diversification, tax efficient that generates cash flow whether it be from interest, capital gains, distributions etc.

    IMHO, total return should still be important for those with an equity only/dividend approach unless they absolutely are not planning to draw capital at any point (leave a legacy).

    Reply
    1. Maybe this is part of what I’m struggling with…it seems easier to focus on an income approach and simply sell some stocks when you want the (extra) money in cash vs. waiting for dividends to roll in. I dunno, I need to think about it more. 🙂

      “In my case the first year withdrawal rate % was less than distributions/interest.” That’s a good problem to have but I wonder if that’s only a function of the bull market we’ve been on (or a lower than anticipated withdrawal rate). I guess those are both good problems to have Deane!

      Reply
  24. The other way of looking at it is with a total return approach, you don’t need to save as much as an income approach, so therefore you can work less, retire earlier or spend more in retirement. That’s a win/win! Plus you have a more diversified and tax efficient portfolio that balances growth and safety.

    Deane, yes, Dan certainly has a knack of distilling the essence!

    Good discussion, Guys!!

    Reply
    1. I hear ya Grant, I also appreciate this discussion. In the end, whatever gets to me to working less, more time with family, friends and to do the things my wife and I want to do is the plan.

      Reply
  25. This is an excellent discussion on decumulation. My wife and I plan on retiring in approx. two Years. We each have RRSP’s, Locked RRSP’s, TFSA’s and non-reg. accounts [we have no private pension plan]. We have been tracking our annual expenses for over ten Years so we have a pretty good estimate of our future retirement expenses. I have been using Excel to try to calculate how we can best draw money from our different accounts to pay the least amount of tax and also maximize the final estate for our children. The strategy that seemed to work was to draw as much as you can from the RRSP’s but stay within your lowest marginal tax rate. The balance of the withdrawal should come from your non-reg account [TFSA if there is no money remaining]. You should also try to draw an additional 10K from the non-reg and deposit it into your TFSA for future tax free growth. This strategy appears to work for us but, it may depend on how
    much money you have in each account. If you have reasonable account sizes at the end of the day most of your money ends in TFSA’s which will be tax free for the beneficiary.

    Reply
    1. Thanks for the comment Ian. You must be getting excited to retire…

      That’s a variety of accounts to manage, we’ll have a few accounts to manage as well.

      Tracking your spending for ten years is very diligent…wow. We do budget forecasts every week but don’t track our spending per se. Maybe we should. We tend to save set amounts every month, invest that money, and then the money leftover we spend rather freely.

      The leading strategy for us right now is tapping into our RRSPs first, at our lowest tax rate before we collect CPP or OAS, or potentially even pensions if we can retire early. At around the same time, dissolve our LIRA as well. We intend to tackle our non-registered accounts next and then finally our TFSAs last, since it will be tax-free money we will be able to withdraw. We figure $1 M in invested assets, a paid off home with absolutely no debt, plus a bit more (some pension income) should be enough for retirement expenses:
      http://www.myownadvisor.ca/dividends/

      In the early years we will focus on “living off dividends” but soon after we retire we’ll devise a plan to start withdrawing the capital since we have no plans to leave any legacy, maybe only some funds to charity or our tax-free beneficiaries. We’ll see where we get! Need to work, kill debt and save more first.

      Reply
  26. Yes, good discussion.

    Mark, I understand where you’re coming from and agree that a dividend only approach forces a good savings rate. It may be a safer bet to plan to leave capital intact in retirement, as long as you accept working longer to get to your number. Great job on staying so focused on it.

    You’ve got some time before thinking of the method you’ll use to generate your cash flow. Your ideas and situation may change in the meantime. I know mine did.

    RE:
    “That’s a good problem to have but I wonder if that’s only a function of the bull market we’ve been on (or a lower than anticipated withdrawal rate). I guess those are both good problems to have Deane!”

    Yes it’s a good problem to have and we are thankful. We could continue to live on income only like in the first year but would be leaving more on the table than makes sense since we have no plans to leave an inheritance. I am simply taking a page out of your book with a slightly more conservative approach early on until we get some more experience and time into retirement, and have built up the FI war chest accordingly, “banking” some of the 2014 capital gains. I want precisely the same control over how much and when we make withdrawals that you mentioned above as I believe we have “enough”.

    In more typical times I see this “income” we receive actually being even higher since currently interest rates are abnormally low. Although bonds, GIC’s etc aren’t likely to see “typical times” for many years to come. You are correct on the lower than anticipated withdrawal rate for year 1. Part of the difference is I didn’t have much tax consequences this year with our cash flow (so net $ was easier to achieve) and we also took less than the plan called for, and are still living a great lifestyle. In the near future I expect we will utilize all interest, distribution/dividends plus sell some assets to generate cash flow and address inflation. Although my assumed investment return rate 3.5% -(1% real) is only slightly above our investment “income” currently so if/when rates rise and/or distributions we’ll be in better shape. If equity gains come close to historical returns we’ll also have better cash flow (using total return approach) available than projected. If they’re both worse over the longer term I suspect we’re all in trouble.

    It occurs to me you’re taking one tack to hedge your bets, and I’m also doing that but just in a different way. I guess the best choice is whatever each of us is most comfortable with after considering all the options. Good luck with your journey and thanks again for posting up your plan and this thread to get us all sharing our thoughts and information.

    It occurs to me you’re taking one tack to hedge your bets, and I’m also doing that but just in a different way. I guess the best choice is whatever each of us is most comfortable with after considering all the options. Good luck with your journey and thanks again for posting up your plan and this thread to get us all sharing our thoughts and information.

    Reply
    1. Yes, we have some time to think about our plans, I’d like to think they’ll stay the same, but plans change. It will be interesting to see how they will change…income approach vs. total return vs. hybrid of the two.

      I would agree bonds/fixed income will not be typical going forward. I think everyone has far too much debt so rates will stay low for decades. This is just a prediction of course – which makes other types of income very important (capital gains or dividends). If we can earn 3-4% real return, I will be happy. Inflation should be offset by dividend increases / capital gains averaging 3% per year. Again, just a guess of what might happen. 🙂

      Reply
  27. Yes, we will likely convert some or all the RRSP’s to a RIF since we will be not be 71 when we retire. This should save us some RRSP withdrawal fees when we need to start withdrawals to support our retirement. Most brokerages charge a fee for each RRSP withdrawal but, no fee for periodic RRIF disbursements.

    Reply
  28. So many possibilities to draw down “all” that accumulated wealth!
    I told my kids that if everything went OK they would not get anything from me when the bucket list is exhausted. But who knows what life holds! I may walk out the door today and not come back . Note! It would not be because of alzhemers. LOL
    At any rate I am not able to keep track of lifestyle expenses very well as I am in sales so on the road. My meals are paid, company car, fuel insurance plates, etc. And obviously as I am not home there are less expenses there as well.
    I still have managed to put together a retirement budget of sorts and come out with approx. $54K gross. Sounds like a lot but I do have $5K a year for travel. I do not, hopefully, plan to rock my way in to the grave. At any rate it is how “I” want to live “MY” life. It also keeps me well out of clawback range as the RRSP gets converted to a RIF. Naturally there is CPP/QPP, OAS and a very small company pension which I am actually drawing right now. OAS starts in October this year. I had planned to be retired by now but s**t happens. Gave my notice for the end of the year though.
    My plan is to live off the QPP & OAS with company pension and draw down the non-registered funds that are taxable. They pay dividends so that prolongs their lifecycle to depletion. Also I plan to shovel $10K a year from them in to the TFSA. Hopefully this brings me to 71 when I have to start depleting the RRSP (RIF). Again, hopefully, I will have sufficient funds at that time to keep contributing to the TFSA while enjoying life.
    AT any rate that is my present scenario. But like I said, sometimes life gets in the way and you don’t know how long you have or how healthy you or those you love will be.

    Reply
    1. Our nieces and nephews aren’t getting a windfall from us if we can help it 🙂

      $54 gross is a good budget for retirement. This is what I forecast in today’s expenses/costs:
      http://www.myownadvisor.ca/retirement-numbers-rules/

      http://www.myownadvisor.ca/income-sources-needs-wants-retirement/

      We figure assuming there is no mortgage, no more RRSP contributions, we self-insure and there are no major variations in our fixed expenses I figure retirement spending could be around $4,000 per month after taxes in today’s dollars.

      Sure, CPP/QPP exists, etc. but we’re not counting on that – that will be “gravy” we hope although what you think will happen in the future and what actually happens are usually two VERY different things.

      As you say, $hit happens!

      Sounds like you’ve thought things out Ricardo, I would be interesting in learning how it plays out for you!

      Cheers,
      Mark

      Reply
  29. This is a good discussion thread with helpful ideas from Ian and Ricardo…and of course Mark. I met with TD and had 50% of my LIRA moved to my RRSP and 50% to a LIF that I will start drawing down in the new year. TD told me that the LIF could only begin in the new year. I am going to take semi annual disbursements from the LIF so as to maximize the dividends that are dripped back into the Vanguard equity funds within the LIF.

    Reply
    1. That’s a good idea: semi-annual disbursements from the LIF to maximize the dividends that are dripped back into the investment of choice.

      I’m planning on moving 50% of my LIRA to my RRSP at age 55. I’ll be tapping my LIRA and turn it into a LIF when I’m 55.

      So, convert LIRA to LIF at age 55 (still close to 15 years away),
      Invest in a few blue-chip stocks producing income inside the LIF.
      Take the income earned inside LIF and withdraw it at account minimums starting at age 55.

      We’ll see how our plan changes over time…!

      I’m not sure what age I’ll be dipping into my RRSP yet but I suspect if our savings plan keeps up, it will be before I/we take CPP planned at age 60.

      Reply
  30. Having thoght about it and discussed with my “finacial advisor” at CIBC, when I convert to a RIF I plan to take the minimum amount out in January of each year. I had planned to take it out right away, like Jan 3rd or close to that, but the advisor said it might be better to hold off till a bit later in the month to see how things have developed and then make the withdrawal and if necessary adjust the amount at that time – like in the third week of Jan.
    From this amount I would hope to max out the TFSA, hold some cash and probably re-invest the left over in to a non-registered equity account with dividends. Again, hopefully the non-registered account wil appreciate or at least, with divs, not diminish if I need to draw on it during the year which is more than most likely. Of course this is playing a game with where you are calling the stock market. This year might not have been so good because of the present correction – if you had invested in January. If you have a longer time frame like say 3-4yrs, this is a great market – unless it keeps sliding down.
    Still working at present so it does not bother me. I am re-investing divs and some spare cash to average down on the stocks. Next year will be different as more than most likely I will be retired.
    Still on track to increase my dividends by 10% over last year. This is my main goal as the divs are what will feed my growth for a short time in retirement. Presently at < $38K for seven months. I may hit $60K at year end if no more companies cut their divs.
    Current cost of interest on the non-registered account is just under $2K (six months) but it has paid me over $11K in divs which naturally diminishes the principal on the HELOC and then I can buy more stocks = YUPPEE! Next year will change all this as I plan to live off the non-registered (taxable) account and let the RRSP grow tax free until 71 yrs of wisdom

    At any rate that is how I presently see my world. Who knows what life will bring? I sure don't

    RICARDO

    Reply
    1. I think the game plan to withdraw from RIF and put the reminder you don’t spend into TFSA or CDN dividend paying stocks, with the dividend tax credit, is a good call Ricardo. I have bias of course, since this is my plan as well: LIRA to LIF to tax friendly non-reg assets over time.

      Thinking about timing the market if you will, we put money into our TFSA as of early Jan. and had we waited we could have bought more assets now vs. then with the market down YTD.

      Such is life…

      I’ve always figured to invest as much as possible as early as possible and let time in the market do the rest. Others would disagree I guess and try and time the market but I suspect they’re wrong more often that right!

      I’m not sure what your expenses are Ricardo but it seems that close to $60k in dividends per year is a very nice lifestyle if you can get it 🙂
      If we include our RRSP assets we’re close to $19k per year now but I don’t include the RRSP in my monthly dividend income updates due to the future tax consequences they present.

      If you have a considerable non-reg. account aren’t you worried about the large RRSP tax deferral when you have CPP and OAS income as well? Seems like you’ll have a tax issue in retirement. That said, a tax issue in retirement is an excellent problem to have!!

      Mark

      Reply
  31. Very interesting and confusing. I wish there was a Canadian online calculator, where one could enter what dollar amount one expects to have in different accounts at various retirement ages and then examine the income tax implications of various withdrawal strategies. Taxes will be a big concern if one has a substantial size portfolio. I am currently reading; YOUR RETIREMENT INCOME BLUEPRINT. Also I aim to find a good tax accountant to validate my withdrawal strategies, once I have settled on a few. Any suggestions for good tax accountants would be appreciated.

    Reply
    1. That would be a very good calculator.

      I know Mackenzie has some decent ones for wealth-building but I don’t know of any for withdrawal or the wind-down. (I’m not affiliated with Mackenzie at all….)
      https://www.mackenzieinvestments.com/en/investor-education/tools-and-calculators

      Daryl Diamond’s book is/was excellent. I hope to post my review of this book in the coming months.

      I don’t know of any tax accountants. I have a few friends who are accountants but I believe they do not specialize in personal taxes or business taxes. More of an auditing function.

      Reply
  32. Helen, I think a financial planner may be more helpful with regard to withdrawal strategies than a tax accountant. Although written for Americans, this article reviews the general principles which you may find helpful. If you are bumping up against the OAS clawback, you may want to draw from your RRSP (IRA in the U.S.) earlier than suggested in the article.

    http://www.vanguard.com/pdf/icrsp.pdf

    Reply
  33. Hello: Okay, maybe I need a retirement and pension focused top-notch financial planner, But, how to find such persons? I want the type of advisor who advises high net worth individuals as to how to maximize their income tax situation. I am not a high net worth client now, but when I reach 65-70 I expect my portfolio to be of a size where taxes will be a key concern.

    There are several excellent calculators on http://www.Taxtips.ca. Names; Investment Income Tax Calculator, and RRSP/RRIF Withdrawal Calculator.

    Mark: Suggestion: Consider having a reference list of great calculators on your web site.

    Reply
    1. Taxes are a good problem to have in retirement Helen, it means you’ve saved enough 🙂

      My understanding about the retirement income “sweet spot” is just under the OAS clawback, which is about $73k per year I recall. If you have non-registered Canadian assets, paying dividends, this is very tax efficient. Deferring a large RRSP assets until age 65-70 could put you into a situation as to getting OAS clawed back. So, all that to say, I can appreciate tax optimization from various accounts is of concern and should be.

      I like that calculator and just added that to my list:
      http://www.myownadvisor.ca/helpful-sites/

      I’ll work on a more robust list of calculators for my site Helen, thanks for that suggestion!

      Reply
  34. Early RRSP withdrawals: Something for everyone to consider, esp. if you have a low income now, but a good size RRSP/LIRA. Each year, withdraw a small amount from your RRSP. It’s not that beneficial to have a large RRSP which you must then convert to a RIF at age 71, and be forced to withdraw the minimum amounts each year, which will then be fully taxable. By the time many of us reach 71, the minimum withdrawal amounts may be very quite large, and the tax hit quite big. You can invest the withdrawn money in Can. dividend paying stocks and then benefit from the Dividend Tax Credit.

    Reply
    1. I should have read this comment before I responded to the other one!

      I know for us, our plan will be to start winding down our RRSPs before we likely take CPP and OAS; at least taking $5,000 per year from each account in early retirement. OAS will be age 67 (or more) for us.

      Reply
  35. Thanks for posting that Marko. I had a look at it and it seems pretty robust. However after doing some inputting I’m not getting it to work properly at all, however I may be more successful if I actually read the instructions. My computer technical skills are admittedly rather rudimentary however.

    You had asked on another site about transferring 50% of my LIRA to my RRSP and an LIF. I am unable to transfer due to my province legislation. I will convert to LIF 3-4 years from now and in the meantime withdraw from RRSP.

    Reply
    1. That’s our plan as well…transfer when we can unlock our LIRA to RRSP, 50% and then likely withdraw minimums from LIRA/LIF until the account is depleted.

      I find the provincial laws regarding LIRAs and LIFs overly confusing. At age 55, regardless of province or territory you should be able to unlock all money and do with it as you please. Sure, there are some tax implications at your marginal rate based on this tax-deferred account but I see no reason why we need to complicate matter other than to keep the folks that right the legislation employed.

      Sorry for the rant!

      Reply
  36. Marko and All: I tried the calculator Marko referred to. (Retirement Planning and Forecasting 2.1 – Retirement Planning and Forecast Spreadsheet (for Canada), The output is pretty complex. I need to study and understand exactly what it’s telling me about my financial situation. It’s not immediately evident.

    It would be good if other readers were to try this calculator and provide some opinions about it.

    Reply
    1. I’m going to give it a whirl later this week. We don’t have enough retirement assets yet but I will do some projections or throw some numbers at it just for fun.

      Reply
  37. You’re very close Mark. For 2015 it is $72,809. Because OAS clawback considers eligible dividends gross up (138%) If my math is right, I think this means approx $52,760 in dividends per person without considering other income; before 15% clawback begins. Although as has been discussed here means those with larger registered accounts may need to start and spread withdrawals out over longer periods. This is a pretty good number considering its indexed and that you may have 2 people in a household to income split.

    IMO, if you’re above these numbers it’s a very nice problem to have.

    Your rant is properly placed. All legislation around LIRA’s, LIF’s etc should be simplified and allow much greater parity and flexibility. The only thing I can think of as a negative is if someone who only had their LIRA went on a spending spree (if rules were relaxed) and then quickly ended up with GIS. Of course current TFSA rules also open up this potential abuse along with those who chose to do nothing towards their own retirement funding.

    Reply
    1. I would agree, if individuals in a household are both faced with OAS clawback issues in retirement, wow, what a great problem to have. Please sign me up now 🙂

      Regarding our legislation *thanks for acknowledging my rant!* I suppose the abuse could happen if the rules were relaxed but I simply cannot for the life of me argue how these rules save people from themselves. My perspective is the more simple and more transparent (most things in life are) the better decisions people can make. Bad behaviour will still occur anytime and anywhere even in a “simple world” but at least it will be more apparent.

      Reply
  38. 100% agree with more simplicity, transparency and not saving people from themselves.

    On the OAS clawback, yes sign me up too! My father remarks periodically about his but quickly acknowledges its a small price considering how well they’re living in retirement.

    Reply
    1. Living well in retirement is the plan, financially but also healthwise. No point having any money as a tool if you can’t enjoy it and I know you feel the same Deane!

      Reply
  39. There is a goldmine of relevant articles on this web site: http://www.boomersblueprint.com/about-daryl-diamond/in-the-news. This is the web site owned by author and retirement specialist, Daryl Diamond. This site also has a great calculator, under the Downloads tab, called RRIF/LIF Calculator. It allows you to anticipate now, the impact of mandatory RIF withdrawals. And, look at his other web site; http://www.diamondretirement.com.

    The bottom line is, once you are older and evaluating the income tax impact of building up a nice RRSP portfolio, you may be inclined to to view the RRSP as a curse versus a blessing. So, start small-ish regular RSP withdrawals well before age 71 when you must convert it to a RIF.

    Reply
    1. I’m a big fan of Daryl Diamond’s book The Retirement Income Blueprint. I need to write my review of this book this fall and giveaway a copy or two.

      I agree with the slow draw-down approach. I think as soon as my wife and hit our passive income goal (http://www.myownadvisor.ca/dividends/) we will consider early retirement. In early retirement, the plan is to drawn down $5,000 from each RRSP each year, before the retirement to turn the RRSP into a RIF. We will also collapse our LIRA as well and turn that into a LIF; with likely 50% unlocked. That’s the thinking anyhow Helen!

      Thanks for sharing those links with others.

      Reply
  40. Haven’t read all comments, but I’ll my 2 cents. First I’m not suggesting anyone follow what I’ve done or even suggest it’s the best approach, It just works for me.

    I’m 100% dividend growth stocks, no bonds, funds etf’s or preferred. I’m also 73 and having to draw down on my rrif. We don’t have a pension other than cpp & oas. So I’ve managed to build a solid portfolio which generates sufficient dividends so I’ll never have to touch our capital unless we want to distribute some of it to our kids & grandkids.

    However, it’s not about me, but what I think others should consider. Forget the 3%, 4% or whatever withdrawal rate. Regardless which stage you are at, starting, accumulating or having collect or draw down, TAXES should be your main concern and finding ways to reduce its impact. Next FEES and finally Inflation.

    During the starting & accumulation phases one can reduce taxes buy maxing out the tfsa, Fees can be all but eliminated by using drips and transferring to a tfsa each year and avoiding Mutuals, Trading & Etf’s (even 0.3% will be thousands of dollars over time). RRSP should be after tfsa is maxed. Finally inflation can be offset with a solid portfolio of good dividend growth stocks.

    When you are in the withdrawal phase, use the age of youngest spouse and withdraw from the rrif as early as possible. Transfer In Kind shares to TFSA and to a non-registered. You can’t avoid the tax on a rrif, but you’d don’t have to sell your shares if don’t need the money.

    Reply
    1. “100% dividend growth stocks, no bonds, funds etf’s or preferred.”

      How many do you own Henry? Blue chippers from Canada and U.S. I suspect? More than 20?

      I recall you own close to 20 CDN stocks, a couple of US stocks and a REIT?

      Without a pension other than CPP and OAS I can see the appeal for income-oriented investments.

      I like what you said and I’m already thinking about it…”TAXES should be your main concern and finding ways to reduce its impact. Next FEES and finally Inflation.”

      This where I feel maxing out the TFSA every year is critical for us.

      Same with a modest-sized CDN dividend paying stock portfolio that is non-registered. I get the dividend tax credit here…

      I use synthetic DRIPs to avoid fees.

      Are you buying anything Henry given the recent correction? More oil and gas stocks?

      Reply
  41. I forgot to mention that we use Full Dividend Reinvestment, not Synthetic Drip. Reinvesting fractions of shares is what Compounding is really about. Some say that they’ll just add the difference into new stocks they are buying, but each to their own.

    Gee the market dropped 5% yesterday, what did it drop in 2007-2009? For those who think living off dividends isn’t as good as living off the pile, calculate how many more shares you will have to sell if one does not have a steady dividend income. Our dividends are up 15% so far this year and will probably be higher by year end regardless how much our market value drops.

    Reply
    1. I know I would hate to be selling equity shares right now, or yesterday, if I had to live off that money. I guess this is why a total return approach must always include a sizeable cash wedge or buffer…otherwise, you are the mercy of what happened yesterday.

      Thanks for your comment(s) Henry – always great to hear from experienced investors like yourself.

      Reply
  42. Our position is the same (20 CDN stocks, 2 US stocks and a REIT), no trades during the past two years. We continue to reinvest most of our dividends and all but one has grown this past year.

    I talked my sister, who is three years older than I, to get rid of all her Funds & GIC’s (some don’t mature till 2017) and we have buying for her. Her income on investments has gone from 1.8% to just under 5%. Got her nothing but solid Cdn DG stocks (3 banks, 2 Utl, 1 Pipeline, 1 Comm, 1 Agr, 1 Reit) and in the past 4 months she has already had two dividend increases. Mutuals, etf’s & preferred don’t provide much if any increases because what one does get is absorbed by fees and some taxes.

    Reply
    1. Impressive: “Her income on investments has gone from 1.8% to just under 5%.:

      For me, the living off dividends and distributions angle is very appealing. I know you read this post:
      http://www.myownadvisor.ca/why-living-off-your-dividends-or-distributions-works/

      Your sister, and you, and I, probably own similar companies: we own banks, utilities, pipelines, REITs in Canada. Then I also index. I own 10 U.S. stocks as well, and index.

      I couldn’t agree more about getting out of mutuals. Here was my mistake on that!
      http://www.5iresearch.ca/blog/my-biggest-investment-mistake-high-cost-funds

      Reply
  43. Mark:
    I sold all my Oil & energy stocks years ago, except enb & trp (which I consider more like a utility). I no longer consider any energy, auto, tech, airline or any other cyclical stocks. For those seeking growth and having years left, they may wish to consider them. I now feel the slow and steady course may generate as much if not more in the long term, without the ups & downs.

    It’s interesting that in most of the investments books, at least the dividend ones. they all have an example of someone who invested in a good company stock, reinvested the dividends and ignored it for 30 or 40 years ago, and now is worth millions.

    Become a millionaire with a portfolio of One stock? or just a few? Now that Cdn’s have the TFSA it’s more than possible!

    Thanks for your kind words Mark.

    Reply
    1. I wish I knew now about dividend stocks in my 20s. *sigh*

      I still hold O&G stocks, like CPG and COS. Great time to buy them now. I also consider ENB and TRP utilities.

      I don’t bother with the airline industry nor tech.

      Well, I hope to diversify enough over time (30 stocks, so I think I have?) to simply let the dividends reinvest and do their thing for another 10-12 years. Then hopefully we an ample savings rate between now and then, we can pull the plug on work; or at least choose when and how we want to work.

      Reply
  44. Regarding Henry’s comments: I second Mark’s motion.

    “Our position is the same (20 CDN stocks, 2 US stocks and a REIT), no trades during the past two years. We continue to reinvest most of our dividends and all but one has grown this past year.”

    Henry: You appear to be an experienced investor who is disciplined in his approach. You could teach us novices a few things. As start, would you share what stocks are in your portfolio? What information sources do you use to select stocks? Thank you.

    Reply
  45. I owe any success I may have achieved (if one wishes to call it that), to Tom Connolly of the Connolly Report. Before I found his site and began to follow his advice (not recommendations) I had anything but success. I read one of his early articles and the opening line changed my entire idea of investing: “If a company does not pay a dividend, don’t buy it, if it doesn’t grow its dividend, don’t buy it either”. It’s been the best $50 per year I’ve ever spent.
    Looking back I would be much better off if I had listened closer and not gone for some with higher yields or tried to diversify so much. Had I stuck to the eight stocks I got for my sister….Hindsight!!!

    Reply
    1. Yes, I recall you’re a big fan of Tom Connolly. I found the same beacon a few years ago, re: if a company does not pay a dividend, don’t buy it, if it doesn’t grow its dividend, don’t buy it either… All my stocks and REITs pay a dividend (or distribution). I index invest everything else.

      You raise an interesting point that you have diversified so much. I think you need at least 20 CDN stocks (banks, pipelines, utilities, telcos, etc.) in a portfolio for diversification. Even then you’re only owning about 4% of the world’s market. You need to find the other 96%? No?

      Reply
    1. Very true Grant, hindsight is easily 20/20. I personally believe going forward the stocks I own will continue to pay dividends, and increase them almost every year. If they don’t, my fallback position if you will is indexing with thousands of companies around the world. For now, I’ll willing to take this equity risk.

      Reply
  46. Our granddaughter will turn 18 next year, at which time my wife will turn over the drip she started for her 8 years ago. She has contributed small amounts over that time and it’s around $12,000. The drip is with BNS and we’ve told her to open up a TFSA, She can transfer $10k the first year and begin contributing funds to buy more bns shares. Each year she will transfer all the shares (but 1) to the tfsa. She should hopefully increase the shares she buys each month and transfer again at yearend. That process will continue till she feels the need for an RRSP, but max the tfsa first (and make up for uncontributed prior years) In her rrsp I’ve given her 15 Cdn and 8 US stocks to choose from (recommended she buy no more than 8 Cdn & 2 US). Based on our conservative projection, she’ll retire early and never touch the capital.

    Reply
    1. Wow, that’s great with the BNS full DRIP! I initiated some for our nephews and nieces as well…I hope the parents (sister, inlaws) keep them up! If they do, after 30-40 years, they will likely be wealthy.

      I used to run full DRIPs but I now only run synthetic DRIPs. If your granddaughter can max her TFSA out every year after she starts full time work, and keep that up over a few decades, she’ll be really ahead of the game – simply let time in the market do its magic for her.

      You are a very generous and sharp investing grandfather!

      Reply
  47. Mark:
    In the past I had 30 to 35 stocks, 8 funds and 4 etf’s. After Connolly I sold the funds and 6 of the stocks immediately and got rid of the etf’s over time. I slowly got rid of 15 more stocks and bought several other DG stocks. I have to admit I did buy some higher yielding and in every case regretted later. I have no regret about not buying any International stocks either individually or by etf’s. When I look at the listing of what makes up most etf’s there are only about 12 of 75 I’d consider owning. So for the 20 I own there are 3 I will sell if they recover (though my ave yield on them is 4.8%). In the rrif I sell off about $10k per year of the lowest yielding (which happen to be the US stocks), so I will probably end up with 15 as a core holding.

    Reply
    1. I feel the same to a degree. With the CDN market, there are only about 30-40 stocks (that raise their dividends rather frequently) worth owning – this is why I index via low-cost ETFs as well, it’s a hedge against my stock selection even though many of the companies I own have been around for generations and have been paying dividends for the same amount of time:
      http://www.myownadvisor.ca/canadian-dividend-stocks-buy-mostly-forget/

      15 as a core holding doesn’t seem very many, but I can’t argue with your success. I recall you have some stellar dividend income Henry (i.e., $90k per year). Very, very impressive. I’m not nearly there yet, nowhere near that, but working on it!
      http://www.myownadvisor.ca/july-2015-dividend-income-update/

      Reply
    1. For sure Dick and great point. I’m not too worried about tax issues in my accumulation years (re: thanks to TFSA and RRSP). I’m really only concerned about the RRSP and/or LIRA withdrawals in retirement.

      Right now, we plan to withdraw $5k per year from each RRSP in early retirement to start winding them down.

      Reply
  48. Dick:
    I think Mark has covered this in one of his other posts, but you’re right, Taxes are something many don’t think about. That’s why we recommended our grand daughter invest in a drip and transfer shares to tfsa. In the short period (one year) the capital gains will be small (if any) and the dividends should not be a problem for her, as her earnings will be low.

    Fees, Taxes & Inflation are the killers of future income!

    Reply
    1. Happy to DRIP all holdings inside the TFSA and RRSP. I will stop DRIPs inside RRSP when I start taking about money each year. I will keep DRIPs running inside TFSA for as long as I can, while maxing out this account. TFSA DRIPs will be the last ones I likely turn off.

      I will stop DRIPs with non-registered account when we’re ready to semi-retire or retire.

      “Fees, Taxes & Inflation are the killers of future income!” LOL but true!

      Reply
  49. Mark:
    Not sure why you would stop drips at any point, except for the cash withdrawals. We must draw down from our rrif’s, but the majority is actually In Kind transfers to tfsa and non-registered, so we can continue to drip the shares. We are fortunate that we only draw a portion of the rrif for expenses, so the rest continues provide a growing income and why our portfolio’s continues to grow.

    Reply
    1. I suppose Henry, rightly or wrongly, I envision us stopping the DRIPs, and spending only the dividends and distributions in retirement from non-reg. and TFSA, and not spending much capital, at least in the early retirement years as we adjust our income and expenses…

      RRSPs and RRIFs are different maybe, I dunno, since in stopping DRIPs I would also be withdrawing some capital at some point.

      In the end, I figure we need enough income generated from our investments to cover expenses, with some safety margin. Then I know we can safely retire. That’s still unfortunately some distance away…

      Reply
  50. Guess it really depends on the amount in the rrsp\rrif. Regardless, the minimum withdrawals percentages are set, and we withdraw the min (as we don’t need more) and to keep our taxes down. As much as I hate to plug any Federal party, I really appreciated the lowering of the rrif withdrawals.

    As always, great site & enjoy reading all the comments.

    Reply
    1. RRIF min. withdrawals are great. Not sure how we will manage our RRSPs yet. Maybe turn it into a RRIF around age 50 at time of semi-retirement….

      I’ve personally never understood why we have RRIF and LIF minimum withdrawals at all, other than a) to keep some accountants in business 🙂 and b) to ensure the government gets their money back!

      I hope in the future we remove all RRIF and LIF minimums…I’d love to see this as an election issue…

      Reply
  51. I was about to ask you Henry about the withdrawals and having to cash some stocks in your RRIF in order to pay withholding tax. However you answered in the meantime that your withdrawals are the minimum.
    How are you then transferring the majority “in kind” to TFSA/unregistered without affecting the withdrawal rate (and paying tax) or is this from some other account?

    I ask because I am in the process of determining my first RRSP withdrawal and looking into all options including an RRIF. However I plan much more than the minimum withdrawal.

    Reply
  52. Deane:
    One can convert a rrsp to a rrif at any age and use the calculation to determine the Min amount they must withdraw. One can also use the youngest spouse to set the rate.
    We have our rrif, tfsa & non-registered with the same broker. Usually in Oct (because we go south for the winter) I send them a letter instructing them on how much cash I want transferred to the bank and which stock(s) sell. I also tell them which stock(s) to transfer to the tfsa & the balance of stocks to the non-registered. The total of these transfer amounts add up to min. It happens automatically in Jan.

    Reply
  53. Hello: What is the rationale for setting up a RRIF at about age 50, versus keeping your money in an RRSP until you must convert into a RRIFat age 71?.

    Reply
    1. Very little Helen, although I like the idea of some cash flow from the RRIF. I’ll probably wait until 65 to turn the RRSP into a RRIF, I dunno…

      My understanding is if you are 65 and older, RRIF withdrawals are eligible for the pension amount tax credit. Taxpayers receiving certain pension income may claim both a federal and provincial/territorial pension income tax credit. This is a non-refundable credit, but can be transferred to a spouse or common-law partner if it is not fully used by the taxpayer.

      So…because RRIF withdrawals are eligible for the pension income tax credit, it may be useful to convert at least a portion of RRSPs to a RRIF in the year in which the taxpayer turns 65.

      What’s your plan for your RRSPs Helen – are you keeping them until your early 70s?

      Reply
  54. Thanks for the complete reply Henry. Sounds like things are running like a clock for you.

    I agree Mark about the RRIF at age 65. If one did not need the money but wants the credit simply place 12K in a RRIF. Withdraw 2k each year until 71 to get the credit. At 71 the mandatory withdrawal will likely exceed the 2K unless a person has very little money.

    Reply
  55. Hello: I’m still trying to figure it all out, and come up with a good strategy. Deane H. just shared what sounds like a good strategy to get the $2000 per year credit. (It seems most people wait till age 71 to get this credit.)

    We need Daryl Diamond to weigh in on all this theorizing.

    I kept a great article on this topic. It was written by Rob Garrick in the Globe and Mail on April 25, 2015. Daryl Diamond was the expert consulted. Title: Retirees Can Save Tax By Trimming RRIFs. What I learned from this is that even with a modest RRIF of $400,000, at age 72, one can expect to be hit with a significant increase in income taxes due to the increase in taxable income when mandatory RIF withdrawals kick in. So, we must take steps to minimize that tax. (So unnecessarily complex.)

    Reply
    1. I hear ya Helen. I’m 30 years away from forcing my RRSP into a RRIF, and I think about it 🙂

      I wrote a post a while back about the RRIF:
      http://www.myownadvisor.ca/mandatory-withdrawals-rrif-101/

      It has the “old” minimums…

      I wrote then “For a newly minted $500,000 RRIF you’ll be forced to withdraw a minimum of $37,400 and you’ll be taxed on that income. The following year, you’ll be forced to withdraw more money and you’ll be taxed on that as well.”

      If folks have OAS and CPP coming in, as well as any pension, they could easily be into OAS clawback territory. That’s not good. I think the “sweet spot” for retiree income is just below OAS clawback territory – at least it seems that way to me.

      I would love to see RRIF and LIF minimums abolished.

      Reply
  56. Helen:
    I did not response to your earlier post directly, because I don’t feel it would be appropriate to recommend specific stocks or provide my holdings. But if you’ve read some of my responses it should be fairly clear that my holdings are 100% dividend growth stocks. Since I have only 20 with 2 are US and I would like to get rid of three, your looking at 15 Cdn stocks. If you made a list of what you thought are the best Cdn dividend growth stocks, you’d probably get a list of 25 to 30. Take away any that have a yield of 2% or less and I think you will have a good list of stocks to choose from. Choose some banks, utility, pipeline, communication, railway, & food to start your portfolio. You may want to add a REIT and some industry. I’d suggest looking for stocks with above average yield and growth. For younger people you can add some low yield with high growth, but avoid high yield and low growth.

    Hope this answer helps.

    Reply
    1. Thanks Henry. I’ll chime in as well…I can’t offer any personal investment advice on this site, for many reasons, but I’ve been happy with my CDN banks, utilities, pipelines, communications companies, and REITs for growth to date. Total returns, and my total return from my combo. of CDN stocks in those sectors rivals the returns of a dividend-like / index ETF XIU over the last 5-years: 8% annualized.

      Anyhow, for what it’s worth…

      Reply
  57. Small question re the idea in Deane H’s post (see above). He mentioned putting $12,000 in a RIF and withdrawing $2000 each year for 6 years (to age 70). Question; Should the amount not be $14,000, since I thought you can get pension credit in your 71st year as well?.

    Reply
  58. helen7777, as far as I can see, the pension credit is available from age 65 onward as long as there is a RRIF withdrawal as much or more than the credit. (If you had a registered work pension before age 65 you would already qualify for the fed credit) Therefore at age 71 your have to move your RRSP to RRIF and the minimum withdrawal rates apply, qualifying for the tax credit from then onward.

    There are provincial credits as well but I think these are income tested and I’m not at all conversant with these.

    Reply
    1. That’s what I thought as well, re: pension credit available for 65+ from a RRIF. The first $2,000 of eligible pension income qualifies for a non-refundable tax credit. “Pension income” can also include income from a pension fund, annuity income, income from RRIF (see our discussion), interest from a GIC offered by a life insurance company and maybe a few more things.

      http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/314/lgbl-eng.html

      Reply
  59. Thank you for the clarification regarding the $2,000 pension credit. Note to self: Set up a RIF account in my 65th year. (I’ll not have a company pension.)

    Reply

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