Weekend Reading – Portfolio drawdown options
Hey Friends,
Welcome to my latest Weekend Reading edition about portfolio drawdown options.
You can read my previous editions below:
Why you should focus on cashflow for your portfolio, and
My approach and thoughts to core and explore investing.
Congratulations to the winners of the six (6) (yes, 6!) copies of Preserving Wealth. I had hundreds of entries to go through and draw some lucky winning names. The author will be sending you your books very soon!
Now, a reminder since my personal giveaway is over, check out Cashflows & Portfolios for more copies to win!
As part of our interview with the Preserving Wealth author Jack Lumsden, we asked him this:
…Based on what you shared above Jack, are there any rules of thumb that might apply to asset decumulation? This includes when to drawdown the taxable account, TFSA or RRSP in what order? What about taking CPP or OAS? Any rules of thumb there or client experiences you can speak to?
I liked his answer but I might be a bit biased since that’s how I intend to drawdown my own portfolio in the coming years.
Weekend Reading – Portfolio drawdown options to consider
Depending on when you plan to retire or semi-retire like I might, the tax consequences involved, and much more, you can probably appreciate the drawdown order could be very different between retirees.
Here are some key ideas/sequences to consider:
1. Non-registered (N), RRSPs (R), TFSAs (T) (NRT)
This sequence might work well if you have built up a modest taxable account value by your 50s or 60s and you might have higher income needs and wants in retirement. To fight longevity risk, you can exhaust your non-registered account first, allowing tax-deferred money (RRSP) and tax-free investments (TFSA) to grow and compound away. “NRT” might work well to fight longevity risk, may apply to those retirees with any workplace pensions to draw from, and help those investors who wish to defer Canada Pension Plan (CPP) and/or Old Age Security (OAS) benefits until a maximum age.
More reading: When to take your CPP benefit
2. Non-registered (N), TFSAs (T), RRSPs (R) (NTR)
Also in this sequence, you can consider tapping your taxable account first but reverse the order between TFSAs and RRSPs – keeping RRSP assets “until the end”. The benefit of this approach is you have some long-term income splitting opportunities, while money continues to compound tax-deferred. (If you are the recipient of a pension and are 65 or older, you may split income from your RRSP, RRIF, life annuity, and other qualifying payments.) The challenge however for some retirees is by keeping RRSP/RRIF assets preserved well into their 70s and 80s, these seniors could be subject to OAS clawbacks depending on their income level. Recall OAS is an inflation-protected government benefit that few retirees want clawed back! More on that in bit!
More reading:
RRSP withdrawal strategies before age 71.
What is OAS and how to avoid OAS clawback?
Of course beyond these sequential orders there can be a myriad of drawdown tactics that can be used to balance short-term and long-term tax efficiency needs, optimize retirement income, let alone fulfill any wealth transfer desires:
- RRSPs (R), Non-registered (N), then TFSAs (RNT) – usually done to minimize taxation and to minimize OAS clawbacks given very healthy portfolio values inside RRSP/RRIF.
- Blended withdrawals – some blends of NRT, NTR, or RNT.
- Custom withdrawals – lump sum withdrawals based on tax bracket management in the “go-go” retirement years vs. “slow-go” years which includes some strategic RRSP bulk withdrawals when minimal other income streams are in play.
- And more and more….
Weekend Reading – my portfolio drawdown order?
I’ll probably adjust my order over time but I wrote about my potential portfolio drawdown order here.
Some of the key advantages of my drawdown order is it will put less stress on my personal assets when I am older, it will provide built-in inflation-fighting power, and it will also be very tax-efficient.
How are you deciding on your portfolio drawdown order? Need some help?
Weekend Reading
As part of my Weekend Reading update, a reminder I can help answer some questions!
I run a very Helpful Site called Cashflows & Portfolios that can help answer retirement income planning and cashflow management questions.
Subscribe for free and hit me up with a comment on one of our case studies!
On the site this week, we in fact wrote about this common question when it comes to portfolio drawdown considerations: can you really have too much in your RRSP?
A nice list of stocks from Bob Lai at Tawcan – his top-10 Canadian stocks to own.
(I own every stock in his list but one. Any guess which one that is??)
Great work by Dale Roberts, highlighting the pathetic returns of these mutual funds and helping a reader (Craig) move to lower-cost investing for wealth-building.
It’s always interesting to try and make some sense of the markets – thanks MoneySense.
Via Ben Carlson, what has the stock market taught us since 2010?
Who is the wealthiest generation? Read on to find out.
Another big thanks to Rob Carrick for the recent feature in The Globe and Mail.
The 2021 Canadian Financial Summit is almost here!
As my blog and readership continues on a upward trend (thanks very much to all readers!), I’m now considering investing within my corporation.
In fact, on that subject and more – yours truly is back once again at the 2021 Canadian Financial Summit to share what I know!
If you haven’t attended the summit in the past, well, this is your chance to do so – FREE.
The Canadian Financial Summit is a virtual summit that features over 35 Canadian personal finance experts discussing a wide range of topics geared towards helping you become the best investor you can be!
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The summit is virtual, free, and it kicks off on September 22nd.
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What else can you learn about at the free summit? Read on:
- Learn how to buy back some time with FIRE!
- How much does it cost to travel FOREVER?
- How to take a tax holiday by working outside of Canada
- Want an Unlimited TFSA? Try moving to these countries with territorial taxation
- Are dividend stocks in a bubble?
- The risks of investing in cryptocurrency
- Should I have Bitcoin in my Portfolio?
- Maximize the New Aeroplan and Post-Covid travel plans
- Don’t let FOMO ruin your investment returns
- Maximize Work From Home tax tips in a Post-Covid World
- Will the Canadian Housing bubble finally pop?
- How to setup a corporation, invest within it, and then pay yourself
- The BEST ETFs in Canada
- Why self-made dividends are better than ordinary dividends in every way!
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Finally, outstanding insight and a good reminder:
Timeless Insight
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Have a great weekend!
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. 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.
We switched from accumulation to decumulation last year, and our strategy is R + work pension. At around age 65 we’ll start our government pensions, which I think is a bit of a compromise between starting CPP at 60 and delaying until 70. Excess from R over our expenses will go into T. We don’t have a great deal in N, so we may siphon it to T where not enough is drawn from R to top up both of our Ts. Our limit on the drawdown from R is adjusted to keep us just inside the $49K tax band.
At this time, T is just a backup/contingency fund. In a year or so we’ll think about what we do with it. We also have an E (emergency fund) in cash, which is just used to reduce the pain of having to pay for an unexpected incident of some kind. I guess E is really part of N, but it’s just cash with no tax implications when we need to draw on it.
Yes, I know some clients we work with at Cashflows & Portfolios like taking the middle-ground with it comes to CPP and OAS – taking both at age 65 but it always “depends”.
RNT and NRT seems to work well for most clients/retirees that have saved well for years, including maxing out their RRSP and having any non-reg. accounts as well.
I think people are really waking up/recognizing that the “T” (TFSA) is not only a great investment account for retirement (a big emergency fund, etc.) but it’s also an outstanding wealth transfer tool as well when it comes to estate planning for fighting longevity risk.
You already know that I know!
Mark
Read and enjoy your postings but never commented.
Been “on sabbatical” since fall of 2015 at 54, wife 52, (last of 4 children finally gone so downsized). Have investments split between registered and non registered accounts including maxed out TFSA (no pension plan as we were self employed for last 20 years of work). Investments split evenly between spouse and myself.
It has always been our intention to draw the maximum out of RRSP without paying any income tax (as this income is fully taxable) with the balance of income coming from dividends using dividend tax credit to offset taxes. To date this strategy has yielded us 40k plus with negligible tax consequences with half coming from RRSP and half dividends. To be fair we saved 2 years of projected expenses in cash and have been using this money to subsidize those things (like travel) which we are doing now in our good health days although still have 1 1/2 years of expenses in cash.
Our situation is somewhat unique but I believe that you should always spend from your highest taxable income account first keeping your total tax bill in mind. As all income derived from an RRSP is fully taxable (regardless of how it is generated) this is the first place you should start. Our investments are geared towards dividend producing ETF’s snd capital gains are rarely triggered as very little is sold.
The big question we all need to ask ourselves is how much is enough. We spent our last working year living on what we thought we needed to spend to live comfortably. With this figure in mind I did the math and decided we had enough saved (after downsizing) and pulled the plug.
Keep up the interesting posts.
Thanks for the great comment Terry.
If you have a healthy RRSP balance, then it makes sense to go with some form or RNT or NRT drawdown I believe. I outlined the key benefits or drawbacks on my FAQs page.
https://www.myownadvisor.ca/faqs/
When it comes to 2-years’ or 1.5 years’ in cash savings, that’s impressive and seems very smart to me – to allow assets to continue to grow as needed.
For investors that have a modest RRSP value, it can certainly make sense to go RNT and to defer any CPP or OAS since those inflation-protected benefits are golden and very bond-like.
Congrats on pulling the plug!
Mark
Hi Mark, it’s always fun chatting with you. Thanks for coming on the show. I’m excited to see your service grow!
Same Chrissy, always a pleasure to chat with you!! Thanks for the share.
Mark
I enjoyed your segment on Explore FI Canada this past week. Regarding your projection services, do you and Joe charge an hourly rate or is it per-projection pricing? It’s undoubtedly an exciting service. I could see a lot of financially savvy and clueless people alike benefitting from a sober second look.
Drawdown is such an interesting topic. I feel like it’ll be more challenging than expected for many of us in the FI community. Mainly because we’re so used to our portfolio going up as we save and invest; seeing our portfolios declining as we drawdown will be jarring for some.
Thanks very much Loonie. Always nice to hear that feedback and I enjoy working with Chrissy and Money Mechanic.
Happy to send you more details over a personal email if you wish? We charge by the services/reports – not an hourly rate at all so you get a full package of information when dealing with us. We can’t offer any advice of course, but we do offer personal takes on what’s worked for us, lessons learned, etc. to help others. Ultimately any financial projections reports are with the clients assumptions, needs and desires in mind. That’s the key 🙂
Let me know if you want a report done for you. In fact, you can also talk to FIRE We Go! for a reference as well 🙂
https://firewego.com/
Cheers!
Mark
Maybe I’m “under-strategizing” but in all my projections I plan to:
A) only use dividends, no matter where they come from (non-Reg, RSP, TFSA)
B) ideally this means withdrawals are proportional
Recently I’ve been modelling taking an extra 30% in the first ten years of retirement. So, if my dividends paid 50k I would boost this to 65k by selling some equities. Ten years in I would reduce the withdrawals by 18% (somewhat timed with delayed CPP and OAS). Ten years later, another 20% reduction to withdrawals. (This take into account inflation of course).
My wife’s modest DB pension helps to permit this strategy.
We want more money for travel, hobbies, leisure etc earlier in retirement with the expectation things will slow down as we go along.
We’ll delay CPP until 70 and OAS as well, if we don’t need it at 65.
Tax wise it looks pretty good at this point but I keep tweaking the model.
Like you James, we will likely “live off dividends” in the early years of semi-retirement. It is my hope my taxable account dividends pay for our condo fees and property taxes, part-time work covers groceries, etc. and RRSP withdrawals (dividends and distributions only in the early years) covers discretionary stuff.
Once I’m fully retired (mid-50s?) I could see us starting the “NRT” approach – slowly wind down non-reg. and RRSPs – leaving TFSAs “until the end”.
This will also allow us to delay CPP and OAS to about age 70. I may or may not take OAS at age 65. We’ll see 🙂
“We want more money for travel, hobbies, leisure etc earlier in retirement with the expectation things will slow down as we go along.”
100% Same here 🙂
Mark
I just got the book “Die With Zero” from the library. As I work through this book it may change how I look at my drawdown strategy. Do I want to work my way down to very little in way of savings and then knowing I will have all of the government income sources still. I’m part way through the book and keen on reflecting over my own path, leaving work without enough saved and just wanting to live my life right now.
Chris I have this book on home at the library and am waiting for my turn. Very interested in reading it to see how it impacts my mindset and strategy.
Great stuff, sounds like a valuable read Maria.
I want to read this one as well Chris. I want to live my life now and hope to eventually “Die with Zero” or close to it.
Semi-retirement for us should be 3-4 years out – that’s what our plan says financially.
Mark
I wish I had a decumulation “strategy”. 🙁
I RRIFfed my equity RRSP and LIRRSP for 2021 to inhibit their growth. The dividends/distributions more than cover the minimum withdrawal for now so there is still a *bit* of growth, but it sure slowed it down. My GIC RRSP is likely going to be there when we die and flow to the endowment funds as per the wills.
The wife’s equity RRSP is just DRIPping away and will for the next 5 years and then get RRIFfed. She will lose her disability wage replacement benefits and CPP Disability at 65 so her equity RRSP will replace that. Her GIC RRSPs will also likely accrue to the estate.
Our TFSAs are for the most part DRIPping, combined with the annual contributions and likely also go to the endowments.
My RIF/LIF minimum payments and my brand new CPP are invested in equities (XIU & XEI) in the non-reg once per month. Once per year, a bunch of shares are donated to the endowment funds from the non-reg to balance out the additions coming from the RIFs/CPP and any dividend payments from within.
If I had to say what we’re doing….I’d say we’re mostly in a holding pattern. Don’t really need any more growth in assets, but happy to take any dividend increases over time. 🙂
I would say you’re doing just fine with your approach Lloyd!
The fact that you don’t need any TFSAs now, in retirement, for any income, tells me you are just fine financially.
I’m a big fan of XIU in a taxable – it’s very tax efficient there.
Let’s hope we get some more dividend increases this fall/winter. Should be some from ENB, FTS and then the financials (all 6 banks, SLF as well).
Mark
It was your XIU suggestion a while ago that got me into that for the non-reg. It works for that account and purpose. I’m not currently adding to it and that will be where the charitable donations come from so the capital gain is not relevant. I’m now buying XEI on a monthly basis (RRIF/LIF/CPP income) and after the XIU shares are depleted in four years I’ll start donating the XEI and buying XIU again. I could have used XIC instead of XEI but I didn’t know about XIC by the time I started buying XEI.
There is absolutely zero thought process to that “plan”.
I actually sold my R, TD and FTS from the RRIF/LIF and subbed in XDIV. XDIV has those three in their top ten anyways (as well some other decent holdings). I was just sort of tidying up those accounts a bit and figured it really doesn’t change my diversification to any degree. The monthly distribution makes it a bit easier for the payments as well. Again, didn’t really put a lot of thought into that decision.
XEI is a good income fund, but it does replicate many of the stocks in XIU as you know.
Very little thought to owning XIU or XEI. Both are up 20%+. XIU has slightly better 10-year returns but meh, not by much.
I can appreciate the monthly distributions are nice for budgeting!
For now, holding my boring list of CDN dividend paying stocks that XIU, XEI hold. I’ll keep ya posted when I buy more! 🙂
Mark
A quick suggestion.
In your email, I would prefer that the current edition link is highlighted in the top section, with a clearer link to previous editions at the bottom, even after your signature.
Thanks for your consideration
Thanks for that Charles and will act on that for my newsletter 🙂
RNT strategy used here, but a bit of a blend since we spend dividends from N (rather than complications of drip) along with RRSP/LF withdrawals and one work pension.
We also feed TFSA maximum each year and add a modest amount to unregistered to build that income stream.
We are easily able to income split to minimize tax and I expect that to continue through our lives unless govt changes rules. Starting RRSP withdrawals earlier in my mid 50’s should help smooth taxes when our deferred CPP/OAS arrive and help avoid/minimize OAS clawback.
Ya, RNT can make great sense for early retirees and folks with a pension. If they don’t start pulling out “R” first, then there is likely OAS clawback issues.
Running my own projections, I’m better off tax-wise to slowly drawdown N (non-reg.) and slowly drawdown R (RRSPs) before TFSAs (T) – which is why my NRT makes sense. I think my projections has me withdrawing about $30K per year from our RRSPs in our 50s and 60s before it runs out in our mid-70s assuming 6.5% returns in the coming decades before inflation.
Exact same thinking:
“Starting RRSP withdrawals earlier in my mid 50’s should help smooth taxes when our deferred CPP/OAS arrive and help avoid/minimize OAS clawback.”
We see that with clients as well on Cashflows & Portfolios.
Mark
It’s a combo of tax implications and spending needs that drive how we use assets for income. Its possible utilizing unregistered assets as well as divvys now “might” work better, but I really think I need to knock down registered more.
Did a calculation & review of our withdrawal status and spending. Burn rate roughly 2.25% based on avg annual balances and 2.75% on initial retirement balance w/o inflation. Spending avg 71500/yr
Using 3.5% return, 2% inflation with 40k withdrawal now rising with RRIF minimums our registered runs out mid 90’s. Waiting for market reset before reassessing. Ha.
Geez, no wonder your registered might last to mid-90s re: uber-low 2.25% withdrawal rate!
Very conservative – worse than me 🙂
LOL. ” worse than me”!!!! I’ll wait to see on that when you’re retired.
On a daily basis we pay no attention to what we spend. Just do what is needed, what we want and satisfies us. The number is whatever it is.
VPW original sheet 5% suggested withdrawal rate, revised with CPP/OAS/work pension incorporated = 6.2% withdrawal rate
Interesting but the actual $$ amounts (not %) are boosted by years of good times. When crap hits the fan I’ll wake up and maybe pay more attention to it.
We seem to live fine, have choices and can probably weather whatever happens. Or maybe we’ll live it up a bit more. Dunno.
hahaha 🙂
Yes, we’ll see when markets change. For now, 20%+ gains YTD. In a pandemic. Wild.
Wild indeed.
CRAZY.