Overlooked retirement income and planning considerations

Overlooked retirement income and planning considerations

I’ve updated this overlooked retirement income and planning considerations to reflect some current thoughts now that interest rates are higher in 2023. Check it out!

I’ve mentioned this a few times on my site: there is a wealth of information about asset accumulation, how to save within your registered and non-registered accounts to plan for retirement. There is far less information about asset decumulation including various approaches to earn income in retirement.

Thankfully there are a few great resources available to aspiring retirees and those in retirement – some overlooked retirement income and planning considerations I’ve written about before:

One of my favourite books about generating retirement income is one by Daryl Diamond, The Retirement Income Blueprint

That was an excellent book, encouraging all retirees to consider the following for any retirement:

  • Lifestyle objectives
  • Priorities
  • Cash flow needs
  • Family issues
  • Health issues

This was my article about creating a cash wedge including our potential approach.

This was my review about The Real Retirement.

In that book, some considerations for structuring your retirement income pillars:

  • Pillar 1 is the Old Age Security (OAS) pension and its companion program, Guaranteed Income Supplement (GIS).
  • Pillar 2 is the Canada Pension Plan (CPP).
  • Pillar 3 includes your mix of tax-assisted vehicles such as Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs) and other accounts. 
  • Pillar 4 includes other assets accumulated over your lifetime such as your primary residence, vacation property (if you are lucky to have one), or stocks held with your brokerage firm in a taxable account.

I believe these are six big mistakes in retirement to avoid.

A review of how to generate Retirement Income for Life.

In this Vettese book he suggests to consider two or more of these approaches for asset decumulation:

  1. Invest in passively managed funds to lower your investment costs and fees over time – keeping more of money working for you (versus in the hands of advisors of financial companies).
  2. Start your Canada Pension Plan (CPP) later in life – something I wrote about here.
  3. Use some (not all), maybe between 25-50% or so of your RRIF assets to purchase a non-indexed annuity.
  4. Make adjustments to your spending habits. In “good times” when the market is hot (like 2017 was), consider spending more. In bad times, when the market declines for a couple of years or remains flat, consider spending less. That is the Variable Percentage Withdrawal (VPW) approach. 
  5. Consider the “nuclear” option of using a reverse mortgage, later in life.

Our retirement income and planning considerations

As I get older, I’m gravitating more and more this aforementioned “bucket approach” for retirement income purposes.

My bucket approach consists of three key buckets in our personal portfolio to address our needs:

  1. a bucket of cash savings
  2. a bucket of dividend paying stocks
  3. a bucket of a few equity Exchange Traded Funds (ETFs).

How much cash should you keep?

Bucket 1 Cash Savings

Simply put, life happens.

So, to help with emergencies in semi-retirement while still working a bit (as I transition away from full-time work), I/we are very likely to keep ~ 1-years’ worth of living expenses in cash.

This cash will be kept in various accounts (TFSA, RRSP) but some of it will be in a high-interest savings account for liquidity as well as within my corporation. 

Further Reading:

How much cash should you keep? Why?

A Cash Wedge is a great way to manage stock market volatility.

Bucket 2 Dividend Paying Stocks

I like getting paid to be a shareholder.

So, I/we intend to “live off dividends” once we’re debt free while working part-time in semi-retirement.

Live off dividends

Bucket 3 Equity ETFs

Sure, income from stocks is nice but growth is important (and essential) too.

Total returns always matter.

I know there is a bigger world out there beyond my basket of “TULF” stocks I focus on for Canadian investments:

  • “T” for telecommunication companies (think BCE, T (Telus))
  • “U” for utilities (think FTS, EMA)
  • “L” for low-yielding dividend growth stocks with growth potential (think CNR, CP, WCN, and others)
  • “F” for financials (you know the names and ticker symbols: RY, BMO, BNS and others).

Beyond these types of stocks, I own low-cost ETFs for extra diversification and growth from around the world. 

Passive and active investing can exist in harmony.

Overlooked retirement income and planning considerations

In no particular order of importance, here are some important considerations.

1. Consider treating government benefits like CPP and OAS as fixed income

You’ll see in my bucket approach above there is really no mention of any Canada Pension Plan (CPP) income or Old Age Security (OAS) income. That’s because while we expect this income to fund some of our retirement needs it’s more of a safety net to cover higher spending needs throughout retirement. 

Given both government benefits also include some inflation protection (CPI), I personally consider CPP and OAS very bond-like. For this reason, I have a tilt towards equities in our personal portfolio and likely always will. This tilt exposes me/us to more market volatility but it should also provide us with better (higher) returns over time than fixed income.

I believe the more you can tilt your portfolio to hold more equities during retirement, including those that pay dividends or distributions, the more retirement income you could potentially generate.

2. Consider treating workplace pensions as another form of fixed income

My wife and I are both very fortunate to have some workplace pensions to draw from in our future. My pension is a defined benefit (DB) pension plan. That means my benefits (income) is defined in my financial future based on my contributions now. My wife’s plan on the other hand is a defined contribution (DC) pension plan. That means her contributions are defined today but her total portfolio value at the time of retirement is at the mercy of market success using certain investment funds. 

If you have DB workplace pension in particular I would consider this pension a “big bond”. 

If you have a DB pension, then consider taking on more investment risk for more potential reward in your portfolio to increase retirement income; using stocks or low-cost equity Exchange Traded Funds (ETFs).

3. Consider the psychological shifts with asset decumulation

Up to now, you’ve been busy saving and investing in your asset accumulation years.

You and I have been told the following:

“SAVE FOR RETIREMENT!”, “PLAN AHEAD, YOUR FUTURE SELF WILL THANK YOU!”

That’s because retirement years are different.

In retirement there is likely no longer a mortgage to pay (at least this is our plan).

Depending on your lifestyle, entering retirement, if you have kids, they might have left the house by now. The costs of raising kids are over. In retirement you no longer have wardrobe expenses for work. You will no longer have commuting costs. 

My point is: some expenses in retirement disappear. 

I believe one easy mistake many folks planning for retirement make is reliance on any rules of thumb. Sure, the 4% rule isn’t perfect; it remains a good starting point but you shouldn’t follow it exclusively.

Why the 4% rule is actually (still) a decent rule of thumb

$1 million generating 4% will of course generate $40,000 in the first year, meaning a $50,000 withdrawal will reduce the account balance by just $10,000. Depending upon how your money is invested, and any future sequence of returns, $1 million may support $50,000 of annual withdrawals for 30 years or more.

In fact, using the 4% rule things could be so successful that 50% you will finish with almost X3 wealth on top of a lifetime of spending using the 4% rule.

4% rule Kitces

Source: www.kitces.com

The reality is, even a modest RRSP/RRIF portfolio of $500,000, saved up by age 65, that portfolio value inside an RRSP can generate some decent retirement income. Combine this income with other assets and any government benefits (CPP, OAS) and many investors at a traditional retirement age may have what they need…

To help you with your psychological shift associated with asset decumulation try and play with a few FREE retirement calculators such as my personal favourites here. 

4. Consider tax efficiency as important but not everything

Unlike your current working years or years leading into retirement, taxes may not be a much; taxed at the source like they are with employment income. By planning the accounts that should be drawn down first, investors can alter and potentially optimize the amount of tax they must pay. Investors can absolutely smooth out taxes over time and ensure they are not incurring a huge tax bite in their later years – when dependable retirement income might be vitally important for elder-age health reasons.

Mind you, financial decisions shouldn’t be made on tax implications alone.

For what it’s worth, even though we’re not semi-retired yet, we believe the following withdrawal strategy could work for us and might work for you as well.

My retirement income and planning draw down order

“NRT” = Non-Registered (N) then RRSPs (R) then TFSAs (T).

This is the default logic in fact for many professional software programs. The reasoning behind it is to force some withdrawals from taxable accounts, first to avoid too much ongoing taxation, then use up the tax liability that is RRSPs/RRIFs, leaving tax-free money via TFSAs “until the end” for estate planning as government benefits from CPP and OAS are sustained. 

This is pretty much our plan since:

  • We don’t intend to touch our TFSA assets in any early retirement, instead, we will let our TFSA assets compound over time.
  • By our early 70s, with part-time work done, with taxable assets likely sold and most of our RRSP/RRIF assets gone, our plan is to live off income from mainly any government benefits (CPP and OAS) and TFSA income/withdrawals. The latter will be tax-free!

A reminder these are some of the key reasons for taking your CPP and OAS as late as possible:

  • you don’t necessarily need the money now (consider exhausting some or most RRSP/RRIF assets before age 70-75);
  • you have good reason to believe that you have a modest life expectancy into your mid-80s;
  • you aren’t concerned about leaving a large estate – you use up some or all personal assets before taking government benefits;
  • you want to maximize inflation-protection.

Here’s when you should consider taking your Canada Pension Plan (CPP).

Should you consider deferring your Canada Pension Plan?

5. Consider death as part of life and planning for it is important

Sadly death will happen to all of us. This makes planning for it important for your spouse and family as part of estate planning.

Related to taxes, based on my readings, pre-retirees tend to overestimate the tax they will pay in retirement.

Someone earning $100,000 of salary will generally pay 25-30% average tax depending on their province or territory of residence, and 35-45% marginal tax on their next dollar of earnings. In retirement, someone with $50,000 of income would pay at most 15-20% average tax across the country, and depending on the sources of income, it could be close to zero! 

Income like eligible pension income, capital gains, and Canadian dividends are eligible for tax credits or reduced income inclusion rates. Married couples can also split income more easily in retirement to minimize their combined family tax.

If you want to know how best to structure your accounts, to name beneficiaries for tax planning and estate purposes, check out this comprehensive post here:

Beneficiaries for TFSAs, RRSPs, RRIFs and other key accounts

When it comes to life insurance, I wrote about a number of life insurance products in plain language here.  I believe retirees need to consider liquidity requirements for the spouse or family to pay off all debts and/or replace any income that would stop upon death.

Retirees also need to identify their Powers of Attorney (PoAs) and executors, including what’s going to happen if they’re incapacitated.  Retirees should strongly consider keeping a list of financial information that is current; documenting bank accounts and investment accounts and pension accounts in an easy-to-find location for their family members. 

Learn all about Wills and get a promo code in fact, to update your own Will, from this article here. 

Overlooked retirement income and planning considerations summary

If you haven’t already gleaned this from my article I hope you’ve noticed a few things above:

  1. We’re far from being fully retired yet but we feel the importance of planning for it. This makes the process of any retirement income planning far more important than the real outcomes that might occur years from now.
  2. We’re looking at our retirement plan as a holistic exercise that includes elements like taxation impacts and estate planning. Retirement is more than just generating retirement income. 

We’re thinking about these things because we believe it’s the right stuff to think about before we execute on our plan. Ultimately you need to determine what’s best for you personally and financially. I hope these overlooked retirement income and planning considerations have helped you out. 

Stay tuned to more blogposts on retirement income and planning as my thinking matures.

What’s your income plan for retirement?  Do you have one?  Are you already there and accomplishing your needs and wants? 

Further Reading:

There are also dozens of Retirement stories and essays you can learn from here.

Instead of focusing on the 4% rule, you can drawdown your portfolio via Variable Percentage Withdrawal (VPW).

Enjoy some FREE retirement calculators such as my personal favourites here. 

Want some personalized help, well beyond what any free tools could ever offer?

Tired of searching for a financial plan and paying too much money? Have you Googled a financial question but can’t get an answer to your specific financial situation? Have you tried all the “free” financial calculators online, but just can’t seem to get the answers that you are looking for?

Have you looked into a financial advisor to run some numbers and/or projections for you but you are not willing to pay thousands of dollars? 

I get it.

I don’t blame you.

I wouldn’t pay that money either. 🙂

Instead, my partner and I at Cashflows & Portfolios offer TWO low-cost retirement projections solutions to support your retirement readiness and planning ideas – to any DIY investors supported by DIY investors.

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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.

43 Responses to "Overlooked retirement income and planning considerations"

  1. Well, that bucket is poorly thought out. Why would one willingly give a free tax gift to the government? Open a TFSA at EQ (or any other high interest online bank), build your cash base in there. When you reach $50k, withdraw $10k per year on December 31st, deposit into your favourite brokerage. Tax free, risk free return (besides the merry band of spenders in Parliament that might implode the economy).

    Reply
    1. Thanks for your comment, Joel.

      Not sure I undertsand your comment but I do intend to keep some cash inside the TFSA (tax-free), and RRSP (tax-deferred) to avoid giving a “free tax gift to the government” as least temporarily since RRSP income/cash when withdrawn is taxed.

      If your comment is about keeping $50k in cash, in perpetuity, inside a taxable account well that’s not my plan 😉

      From my post:
      “This cash will be kept in various accounts (TFSA, RRSP) but some of it will be in a high-interest savings account for liquidity.”

      Cheers,
      Mark

      Reply
  2. Hi Mark
    Very good article. I’ve been with firms that don’t really address this phase. Honestly, they’re too concerned with their take on my portfolio and often I’m compared to their other clients and told where I fit with the others.
    You mentioned drawing from RRSPs in your 50 and 60s. I am 55 and plan to continue for another 10 years. As a dentist, I’m in the highest tax bracket. If I start withdrawing now from my RSP will I be taxed at the highest rate? Should I start drawing from the non registered account first.
    The biggest concern is I have steady cash flow and not ready to withdraw from any of my accounts and my practice is getting busier so I may need to slow down. Is there a problem if I start at 65 to touch any of the accounts? I did see your list of retirement planners and have contacted someone. I’m hoping they are as helpful on retirement as your preeminent advice has been on investing.

    Reply
    1. That’s the challenge I find with some planners Pat – they are after your money to manage too. Fee-only-planners are the way to go IMO.

      Yes, drawing down your RRSP in your 50s and 60s assumes you are not working much and/or you are withdrawing in your lowest income years. It would not be wise to withdraw from your RRSP in higher income earning years. Withdrawing from a taxable account can be helpful but it really all depends…how much money you want and how much taxes you wish to pay.

      Generically speaking, leaving TFSAs “until the end” is rather estate smart.

      Happy to help Pat, just can’t offer direct advice but I’m free on the site 🙂
      Ha.
      Mark

      Reply
  3. The retirement calculator is such a valuable resource. To be honest, the retirement calculator tells me I have a 90% chance that I can retire today but that 10% chance is really scaring me so maybe one or two more years. I don’t want to make a choice that I regret down the road.

    The decumulation phase is absolutely important to plan for.

    Reply
    1. Thanks David – and yes it is, very important to get decumulation phase right. A lower “safe” withdrawal rate of 3-4% in the early years, we find, helps most people ensure they have enough to spend throughout retirement.

      Reply
  4. Drawdown is a very important part of retirement planning. And very different depending on where you are financially. For us, it’s all about how much can we pass on to our heirs. The dividends from our various accounts cover more than all our expenses. So we plan to leave all equity behind. So how do you keep as much as possible? Leave TFSA for last, totally tax-free. Non-registered accounts will be taxable only on the capital gains accrued in them. We occasionally sell a holding and pay the tax rather than holding forever and accumulating a large tax liability. Then buy it back when we can. Use up the RRIF accounts first and pay the extra tax now and leave your estate with as much equity as possible. We are also waiting with CPP and OAS until 70 to give us more time to draw down the RRIF’s.

    Reply
    1. Ya, we believe our drawdown order is likely corporation > taxable > RRSP then finally TFSAs. I could see up deferring CPP to at least age 65 if not age 70. Likely take OAS at 65 since the benefit of deferring OAS (over CPP) is not as good with current rules.

      At lot will depend on how we can smooth our taxes as we begin semi-retirement in a few years. Lots of math to consider 🙂

      Reply
  5. Great article Mark as usual !! I have 15 years untill retirement that if I wait till 65 , I enjoy working and it keeps me busy and keeps my brain working as well 🙂 we can have an easy early retirement just if we rely on our rental income plus my RRSP and my wife’s pension and leave TFSA till later in life and not to forget help my kids getting their education and buy their first home maybe I’m still an old fashion guy who believes in buying and not renting this is why I had my first mortgage at 19 🙂
    Thank you for all the great info it will sure keep me busy till your next post.

    Reply
  6. Hi Mark,

    I enjoyed the update.
    Like you, I think there’s a lot of sense to deferring the TFSA withdrawals. I like the idea of timing that with government pensions, coupled with the defined benefit pension plan I’m also currently paying into. Makes sense to have the non-taxable investment income be used at that stage.

    Take care,
    Ryan

    Reply
  7. Mark, great article full of helpful insights and knowledge.

    Our situation is a bit different since we are always in self-employed business, for the last 15 years, mainly in rental properties investing and managing. Now, we have outsourced the day to day property management to professionals, our daily job is to monitor the equity market, readings and researching, occasionally balancing the portfolio etc. We never thought about retirement, because we always work for ourselves. However, from money management perspective, we are in the planning mode of growing the portfolio, putting the insurance and estate plan in place, and set up the withdraw plan. Your blog really triggered lots of further research and planning. Our household age is 55.6 (wife is 52, and husband 60), and we will not have much CPP (due to self-employed) and OAS (both are immigrants), we do have small portion of RRSP and TFSA, but still need to plan for how to withdraw the funds from different accounts in the right sequence. Some assets are in personal name, some are in Corporation, thus the withdrawal policy becomes more and more important.

    Different stage has different plan and policy, thus, learning from your site and wise readers here gives us lots of value, thank you, Mark, for your great efforts and resource sharing.

    Reply
    1. Great problems to have overall Angela re: small portion of RRSP and TFSA, but still need to plan for how to withdraw the funds from different accounts in the right sequence including Corporation.

      My experience is, with some clients on draw down plans, to draw down the Corp. early to help smooth out taxes over time. This way, you are leaving some personal assets until then end, allowing RRSP time to compound away. Maybe something to consider since even a small CPP can be boosted by 42% if you defer to age 70.

      Thoughts?

      Reply
      1. Mark, thanks for the reply and suggestions. I never thought about the sequence of the withdraw plan yet. The assets in the corporation are financial assets, all income generated will be taxed on the highest tax rate due to the nature of passive income. Thus, how to draw from Corp. (dividends versus salary) is still a strategy.

        The sequence could be like: collapse company assets first, RRSP second, personal assets third, then TFSA last. Will see how it evolve over the next 10 years.

        Mark, I love reading your site/blogs/comments from the readers, because it covers broader plan for one’s financial picture, thus requires long term strategic planning, then stick to the plan and take action one step at a time with flexibility to adjust the plan along the way.

        Reply
        1. Great stuff Angela and to your points about the draw down order, this is exactly what I am seeing with some business owners:

          Wind down corp > then withdraw from taxable > then withdraw from RRSP, then finally keep and then withdraw from TFSAs “until the end” as they defer and take CPP and OAS after age 65. Food for thought!!

          Reply
  8. I saw my comments from three years ago. Now I think we are pretty much FI already. Still working. But we are trying to shift the mind now from saving to spending. Our savings rate has been 50% and even higher during the pandemic. We can spend all our salaries now and just let the portfolio grow. It will be a hard task though. Old habits are difficult to change.

    Reply
    1. Outstanding May!! “Our savings rate has been 50% and even higher during the pandemic.”

      Yes, the asset decumulation puzzle may be tough for you psychologically – I know it might be a change/challenge for us to wrap our heads around!

      Reply
  9. I think you should have a link to your medical/dental benefits article as this is something that needs to be considered as it can be a 5000-6000 dollar impact on your yearly retirement income.

    Reply
  10. 2 very true points I learned in pre-retirement planning

    1 The first five years are the best five years. Make use of them.

    2 Before retirement the biggest concerns people have are:
    Will I have enough money?
    What will I do with my time?
    Keep contact with friends.
    Getting along with spouse.
    Maintaining health.

    Two years into retirement people have exactly the same concerns but in exactly the opposite order.

    I’m well into retirement and still find value in your post. Thanks.

    Reply
    1. Valuable stuff Rich. We hope to make the most of the early/go-go years for all the reasons you know.

      It is my hope we can have a long, happy semi-retirement/retirement starting in a few years. Health is wealth.

      Thanks for your readership. Great to learn from others like you about what’s really important.
      Mark

      Reply
      1. Great and valuable observations from Rich, so acknowledging that our time is finite, we’ve read about you bucket strategy Mark, but what is on your bucket list?

        Reply
          1. Mark, some of the most specific things on my list are:
            – Witness a large rocket launch in person.
            – Watch humans return to the moon.
            – See the images and data from the soon to be launched James Webb Space telescope.
            – See the images and data from the new large land-based telescopes currently under construction (TMT and ELT).
            – See ITER generate it’s first plasma (a nuclear fusion experiment in Europe).
            – Visit CERN, ITER, and JET (fusion reactor experiment in Oxfordshire, UK).
            – Witness a total solar eclipse in person; in a sky free of clouds.
            – Walk the Samaria gorge in Crete.
            – Experience weightlessness.
            – Go on a hot-air balloon ride somewhere with lots to photograph.
            – Be an extra in a movie or two.
            – See humans build a permanent habitat/base on the moon, ideally called Moonbase Alpha (TV series Space 1999).
            – Watch humans land on Mars.
            – Watch all my 3D movies before my TV or Blu-ray player break.

            So, there it is, the beginnings of my bucket list, written down for the first time. Thanks

            Reply
    2. Some good points on friends, spouse, health, and planning how to spend time Rich. I would add family, hobbies and ensure health includes lots of physical activity, sleep and quality diet. Keep some challenges and good habits.

      I suspect concerns with having enough money after being in retirement may depend on a lot of variable factors like timing of retirement relative to markets, amount of discretionary vs needs dollars planned for, market returns, amounts of steady income for reliable cash flow, and health issues to name a few.

      I don’t put any limits on when may be my best years in retirement. IMHO, much of that depends on your age at retirement, and individually to the last 3 points I made above. I’m 7 years plus in now (age 62) and having a fantastic time in retirement and find nothing I can’t do now that I did 30 years ago. My wife is getting close to 10 years retired. It is similar for her. Still have plenty of go-go years ahead, and beating back covid will be a welcome improvement.

      Reply
    3. Great points. We had not thought of it that way but definitely in the first few years we were fairly frugal, do we have enough money? About ten years later our main issue is what to do with the money we have to take out of our RIFs each year.

      In the first few years we did not travel to exotic lands, that was the plan for last winter. When travel opens up fully, will we be fit enough to enjoy those trips? Maybe we should have been less frugal.

      Reply
    1. Very odd Kevin. I use Chrome for my site all the time and it’s fine here – my end. Have you tried to refresh your browser? Sorry you’re having issues…I will see if my host is seeing anything on their end.

      Reply
  11. Great summary Mark and well thought out considerations and plans. As you know we’re living out a retirement drawdown sequence now similar to what you’ve outlined.

    I would be inclined to have a much larger cash wedge & less exposure to equities (and sequence of return risk) during the earlier retirement or semi retirement years (play it safer) before work / govt pensions kick in and when you want to draw down RRSPs. Your DB pension can be considered a “big bond” as you stated but a DC pension can’t really be considered that unless it is invested that way (FI).

    Reply
    1. Fair comment about the DC plan. I suspect my wife’s DC plan will be 50/50 equities and FI. If we can use most of the pension money for everyday expenses, the rest of the assets in our 60s or 70s (non-reg. income, CPP and OAS) will for extras.

      I’m sure my thoughts about the cash wedge will evolve but right now, as I work, I can’t imagine having tens of thousands of dollars in cash while I have a mortgage 🙂

      Reply
      1. Fair statement about holding lots of cash while also having sizable debt, other than a modest amount for emergency fund. Makes no sense now in accumulation stage and pretty hard to truly plan that far out when you have other priorities.

        A constant in investing/finances I’ve found over the years is that my ideas, priorities, and plans change and evolve with time.

        Still having issues getting to current pages of your site outside of using the email links you send. Doesn’t work no matter what browser is used.

        Reply
  12. You have certainly done a great job to save and invest and have a great plan for retirement too. We are already in our 50s but cannot retire yet. I blame it all to the young kids. LOL. Actually, it’s all because we did not pay enough attention to investing. Fortunately, it’s not too late for us yet. It’s not like we have to retire next year. I expect we could become FI in five years. Most likely we would continue to work after that. I do enjoy my work and am proud of my career. But we will have more choices then.

    Reply
      1. We are doing good in the savings department, I guess. But not in the investing department. For years, the money was sitting in money market and savings account, losing its buying power. Well, better late than never.

        Reply

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