Why drawing retirement income is personal

How much annual retirement income can you safely withdraw? Which source of savings should you access first? When should you start government benefits? What guidelines can you follow?

There is no cookie-cutter approach to withdrawing retirement income. Here are just some of the factors that make one retiree’s income plan different from another’s.

Risk tolerance

Say there are two retirees, one with a medium tolerance for risk and the other with a very low risk tolerance.

The retiree with a medium risk tolerance recognizes that retirement can last 20 years or longer and holds a sizable portion of their portfolio in equities. They want investment growth to help fund their later retirement years. This retiree uses a tax-efficient systematic withdrawal plan (SWP) for their non-registered investments to generate income that’s a blend of interest, dividends, capital gains and return of capital.

The conservative retiree wants retirement income without risk. Upon retiring, they divided their Registered Retirement Savings Plan (RRSP) assets between a life annuity and a Registered Retirement Income Fund (RRIF). Most of their retirement income is from fixed-income investments and Guaranteed Investment Certificates (GICs), supplemented with guaranteed annuity payments that help cover basic expenses for their lifetime.

Order of withdrawals

How much a retiree draws annually from each income source and in which order requires a customized approach.

Say a retiree opens a RRIF and withdraws the minimum required annual amount. What income source should they access next? A common approach is to first tap favourably taxed non-registered investments, then the Tax-Free Savings Account (TFSA) and leave highly taxed RRIF withdrawals to later years. This way, you pay less income tax in your earlier years, and you allow your RRIF assets to grow tax-deferred.

This strategy works for many retirees, but not for all. For example, a retiree may be in a situation in which withdrawing from their RRIF last would result in required RRIF withdrawals that push them into a higher tax bracket. This retiree may choose a calculated mix of non-registered, TFSA and RRIF income over the years.

Government benefits

Should you start Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) benefits at age 60, 65, 70 or another age in between? Should you start Old Age Security (OAS) payments at 65 or defer anytime up to 70? There is a good answer, but it’s different for everyone. Several personal factors must be taken into account, and the decision involves your other income sources.

Tax-free income

The need to customize a retirement income strategy is also evident when looking at the various ways to use a TFSA. One retiree may need more income this year, have already reached the threshold of their tax bracket, and withdraw TFSA funds to avoid paying more tax. Another retiree may have deferred CPP/QPP and OAS benefits to age 70 and use TFSA funds to help provide retirement income in their 60s. A third retiree may want additional income, but be in a situation in which more taxable income would result in a clawback of OAS payments, so they access tax-free funds from their TFSA.

Many factors affect your personal retirement income strategy—from your risk tolerance, marital status and net worth to your lifestyle expectations, marginal tax rate and estate plans. Talk to us when you’re approaching retirement to get your own plan started.

Retirement income withdrawal strategies

Determining the annual dollar amount of retirement income and its sources can be different for each retiree. Here are some common methods.

The 4% rule. A retiree withdraws 4% of their total retirement savings in their first year of retirement. Each year, they withdraw the previous year’s amount plus an increase to account for inflation. Note that 4% is a guideline—the retiree may set a different percentage.

Dynamic withdrawal strategy. Annual retirement income is set as a range, with the low and high limits either a percentage of retirement savings or a dollar amount. The retiree withdraws higher amounts when markets perform well and lower amounts when markets are down.

Bucket approach. A retiree’s savings are in three different pools, or buckets. They withdraw retirement income from the first bucket of cash-equivalent investments, safeguarded against market volatility. The second bucket typically holds fixed-income investments. The third, designed for longer-term growth, holds equities. Funds from buckets two and three replenish the first bucket.