An income layer cake

Your retirement income will come from a variety of sources: government, pensions, your portfolio, part-time work, and maybe even your home equity. How can you keep your cash flow smooth and tax-efficient?



From the February/March 2013 issue of the magazine.


It’s easy to feel overwhelmed with questions about how to draw retirement income. When do you start collecting government benefits? Which do you tap first: RRSPs, Tax-Free Savings Accounts (TFSAs) or non-registered money? How do other sources of cash flow like employer pensions, annuities and home equity fit in? How do you make sure your income is reliable?

These issues are daunting enough when you consider them individually. But then there’s the burning overall question: How do you put it all together?

One good approach is called income layering. While there are several versions, the general idea involves using different sources or “layers” of income to make cash flow smooth, reliable and tax-efficient. Think of it as a layer cake of cash. The base (what I’ve called Layer 1) is composed of income that is highly reliable, but usually not tax-efficient or flexible, such as government and employer pensions, annuities, and income from part-time work (if it is reliable and steady). Then you add a more tax-efficient Layer 2: this includes sources of income that are less reliable but more flexible, like your investment portfolio. Finally, you top it all off with Layer 3: the equity in your home or other property, which you can tap late in life if necessary.

Many financial planners use a variation of this approach, including Douglas Nelson, author of Master Your Retirement, and Daryl Diamond, author of Your Retirement Income Blueprint. In what follows, we’ll show you how you can adapt these ideas to your own situation.

“It’s all about taking less risk, paying less tax, generating more income and connecting the dots in those pieces,” says Nelson, a portfolio manager with Nelson Financial Consultants of Winnipeg.

Income first

Nelson advocates an “income first” approach, placing the focus on generating a sustainable, tax-efficient cash flow that meets your spending needs. That in turn should drive your investment strategy, he says. Nelson suggests retirees aim to have at least their basic spending needs covered by secure sources of income in Layer 1, and says they shouldn’t rely on income from investments in Layer 2 to cover more than 30% of their total spending.

For retirees without good employer pensions, building a solid income base takes some effort. You should look at all sources, including the potential to work part-time, taking government benefits as soon as you retire, or purchasing an annuity. The income benefits of working part-time are obvious, but we’ll consider the other two opportunities in more detail.

Building a base

At one time you started Canada Pension Plan (CPP) and Old Age Security (OAS) at age 65 and that was it. Now you can start CPP anytime between 60 and 70, and OAS between 65 and 70. (Younger Canadians will eventually collect OAS between 67 and 72.) If you start early, you receive more payments, but each one is smaller. Start them later and you receive fewer payments for larger amounts.

There’s no huge advantage or disadvantage whatever your start date if you have average life expectancy. But if you have reason to expect an early demise, you should generally start your pensions as soon as possible. If you have reason to expect you’ll live to an exceptionally old age, then deferring might make sense. (For more details, see my article CPP: Less now or more later.)

Consider how this decision fits with your overall income needs. If you’ve recently retired and don’t have a lot of other secure income, you’ll probably appreciate a boost in guaranteed income. By shifting the timing of these government benefits you’ll provide a smoother flow of income as soon after retirement as possible…

For more on buying an annuity, portfolio options, making investment income more reliable and your home as a safety net, pick up a copy the February/March issue of MoneySense on newsstands now through March 31 or while quantities last. You can also buy it direct from your iPad.

David Aston, CFA, CMA, MA, writes about personal finance. You can share your retirement spending experiences by emailing He might include your experience in a future article.

5 comments on “An income layer cake

  1. I have been buying investments like GIC's,government bonds,strip bonds for the last 25 years.I bought long term bonds for higher yield and income needed in retirement. I bought GIC's for short term money and income. I built a laddered or staggered government strip bonds portfolio for future needs and income smoothing in later years. I have GIC's 1-5 years,federal,provincial strip bonds 6-26 years and long term bonds with yields of 4.6%-9.41% I bought for long term income. I have money coming in every year in interest income and matured investments.

    I built my total portfolio for liquidity,flexibility,income,higher average interest rate,bond yield. My average yield or rate of return is 6.50% today and even with lower bond yields at today's rate I calculated I will still have a 6.00% sustainable long term yield. I am currently getting about $102,000 in interest income.

    I knew interest yields would drop so I bought 75% in long term strips, bonds,25% in shorter to mid term bonds,GIC's,strip bonds. Today a provincial strip bonds are yielding about as follows 10 year 3.30%,12 year 3.50%,15 year 3.60%,18 year 3.80%,21 year+3.90%. A 5 year GIC is at most 2.85% but most pay 2.50%. My main goals was to get a long term sustainable overall higher bond yield/interest rate,income for the long run and liquidity. I achieved this but it took a great deal of saving,investing and discipline.

    You have to stick to it. Maximize your RRSP's,TFSA's,RESP's,non -registered accounts, and you will get there. Here is an example, A 33 year old saves $12,000 a year in a TFSA,RRSP combined and if he or she can get 3.80% for the next 32 years he or she will have $725,839.28 at age 65. If interest rise to 4.80% than it will be $870,730.15 at age 65.


  2. If you read the whole post Rick than 6.50% average bond yield I have achieved strategically buying long term bonds,strips bonds,GIC's over the last 25 years it is $102,000/0.065=$1,569,230.77 capital.
    Today, it is much more difficult .You would need $102,000/0.036=$2,833,333.33 in capital.This is is why you must take maximize your RRSP's,TFSA's because this is the easiest,fastest way to achieve your financial goals.Now you know why I always bought longer term bonds so I could fix the yield/interest rate for more than 5 years unlike a GIC.

    The $102,000 in interest income is a difficult benchmark but I never thought I would get to this point.I just started saving,maximizing my RRSP's,TFSA's more recently and investing using compound interest on my side instead of paying interest to everyone else credit cards,car loans,mortgages,car leasing,lines of credit etc. Try to stick to a more achievable financial goal of being debt free and say a $36,000 a year interest income goal.

    Today's lower interest rates are not going to be here for ever so use a 3.80% long term provincial strip bond yield for TFSA's,RRSP's.The $36,000/.038=$947,368.42. If you don't start you will never get any closer to your financial goals.


    • Great thanks for the tip!


  3. generate 102,000 in income a year how much capital does one need?


  4. I think this is great advice. We've been advocating income layering to our clients for some time and whilst it isn't the right solution for everyone, it certainly is suitable for the small majority. Clearly it does depend on the level of savings, pensions and equity but those with a standard portfolio should certainly consider it.


Leave a comment

Your email address will not be published. Required fields are marked *