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.
What might be some good retirement withdrawal strategies?
How different is asset accumulation vs. asset decumulation?
Read on, why lacking consensus on retirement withdrawal strategies is an issue and what you can do about it.
Asset accumulation vs. asest decumulation
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.
Actually, I don’t mind the 4% rule so much – it’s a great starting point.
Problems 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, inflation 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. You should consider the same.
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% of our portfolio invested in dividend-paying stocks from Canada and the U.S. (say about 30-40 stocks in total) and use the dividend income generated from these investments for living expenses, and
- 50% of our portfolio 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 be considered in early retirement to avoid any negative sequence of returns risks.
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.
Lacking consensus on retirement withdrawal strategies summary
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.
For the most part, I see (and I think you should consider) the following key concepts for any retirement withdrawal strategy:
- Own a modest cash wedge to ride out market volatility.
- Own a mix of dividend paying stocks for passive income – without having to sell any assets when you least expect it or need to.
- Own growth-oriented ETFs to deliver long-term capital appreciation.
I’ll keep you posted if any of those three ideas change!
As a retiree – how did you come up with your retirement income approach? As you plan your retirement , what’s your income game plan?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
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.)
That’s a good plan Helen: re: consider setting up RRIF in year #65.
You’re welcome Mark. It’s good to have plenty of people exchanging questions and information.
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.
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
Thanks Deane. I appreciate your input, expertise and engagement on the blog.
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?.
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.
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…
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.)
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:
https://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.
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.
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?.
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?
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.
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.
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.
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…
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.
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…
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!
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!
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.
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:
https://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!
https://www.myownadvisor.ca/july-2015-dividend-income-update/
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.
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!