Smart ways to crack open your nest egg

Drawing down your portfolio is just as important as building it

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From the September/October 2014 issue of the magazine.

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retire_income_gettyIt’s probable that most readers of this magazine are still in wealth accumulation mode. That’s certainly the focus of the financial services industry and by extension the financial and mainstream media.

But with 10,000 North American baby boomers turning 65 every day for the next 20 years (according to Pew Research Center), it’s clear the next big trend is going to be wealth DE-cumulation. After 30 or 40 years of working, saving and investing (what author Timothy Ferriss dubs “slave, save, retire” in The 4-Hour Workweek), near-retirees will be forced to undergo a massive shift and think about how to start withdrawing all that money.

This is by no means a trivial exercise. In fact, as finance professor Moshe Milevsky of York University recently pointed out, no less an expert than Nobel-prize winning economist William Sharpe declared this to be the single most challenging nut to crack in all of personal finance and

Milevsky, retired actuary Malcolm Hamilton, several other retirement experts (and I) recently took part in a brainstorming session sponsored by a new entity called The Decumulation Institute. It was launched on April 1 by Hungarian emigrant John Pur, formerly of pension consultants Cortex Applied Research Inc.

The institute’s focus is to help corporate sponsors of defined contribution pension plans better serve the needs of their plan members on this vexing issue of decumulation. By extension, the principles also apply to RRSPs and RRIFs.

Moving from accumulation to decumulation requires a radically different mindset but it’s arguable the vast majority of financial advisers are more focused on the former than the latter (perhaps because they themselves are still accumulating!). I’m aware of only a handful of advisers that specialize in decumulation: notably Daryl Diamond, who outlines the issues in his excellent book, The Retirement Income Blueprint.

Turning your savings into an income source is tough—do it wrong and you’ll run out of money

At the institute’s inaugural meeting this summer, the discussion started with the role of annuities. Pur noted it’s a puzzling fact that in practice annuities are much less popular with retirees than they should be, given their theoretical advantages. If retirees fret primarily about outliving their money, the “longevity insurance” aspects of life annuities would seem to be a no-brainer. Indeed, “economists seem to agree annuities are the best retirement vehicles for most people,” Pur says. But whenever they are offered, “Only a fraction of retirees opt to buy them.”

Decumulation is complicated by Canada’s byzantine tax and pension laws, and the same high investment costs that plague the accumulation side. As Hamilton noted, devising an efficient decumulation strategy must take into consideration not just investment costs, interest rates and fluctuations in the stock market, but also two factors that trump those purely financial considerations: tax and government benefits.

In accumulation mode, tax is scarcely considered as long as money is held in tax shelters like RRSPs and TFSAs. But in decumulation mode, those turning 65 must consider such things as clawbacks of government benefits like Old Age Security or the Guaranteed Income Supplement. As age 71 looms, would-be retirees must also factor in the forced withdrawal and taxation of Registered Retirement Income Funds (RRIFs), withdrawals that eventually force most retirees to break into capital.

Rational decumulation tactics include shifting investments to TFSAs, which upon withdrawal trigger neither tax nor benefit clawbacks. Another strategy is the so-called “RRSP meltdown.” This goes hand in hand with the idea of deferring Canada Pension Plan benefits to age 65 or 70, and doing the same with OAS benefits (which start at 65 for today’s retirees, but won’t begin until 67 for younger folk still in the workforce.)

Better to start drawing down on RRSP balances earlier in retirement, this reasoning goes, with the first annual $11,000 or so withdrawn almost tax-free, according to the federal portion of the Basic Personal Amount ($22,000 per couple). Still, by the end of the year you turn 71 those RRSPs must be annuitized or converted to RRIFs, at which point forced withdrawals come into play. You’ll pay tax on those withdrawals but the first $5,500 ($11,000 for couples) can be pumped back into TFSAs, generating more future tax-free investment income.

And what of annuitization? The question is not simple because health and longevity are interconnected. Assuming good health and normal prospects for a long life, Milevsky and others see annuitizing at least partially by age 85, keeping in mind some pensions and enhanced CPP and OAS benefits deferred under 70 also act like inflation-indexed annuities.

This topic won’t be going away any time soon. At MoneySense’s 15th anniversary event in May, David Chilton predicted this will be the dominant theme in the next decade, as more boomers grow older and enter semi- or full retirement.

Jonathan Chevreau is editor-at-large at MoneySense. He blogs at and here.

2 comments on “Smart ways to crack open your nest egg

  1. The RRSP Meltdown strategy involves going into debt so that the deduction of interest costs offsets the tax on premature RRSP withdrawals. That worked when interest rates were higher, but at today’s 5% interest rates you would have to borrow humungous amounts. Eg to withdraw $10,000 at a 30% tax rate creates a $3,000 tax. You would have to borrow $60,000 to have enough offsetting interest expense. And don’t forget that the $60,000 would be invested to earn profits that again increase the tax bill.

    The blanket advise to drawdown RRSPs early in retirement is most often wrong unless there is TFSA room. And since TFSA room is so small this is hardly worth it. Play with your own variables on the tabs called “CollapseEarly1” and “CollapseEarly2” at the spreadsheet The early withdrawals of any material amount will push you into a higher tax bracket that will offset any future sheltering of clawbacks.

    If you have an intermezzo between early retirement and the start of any benefits that create taxable income then early drawdowns may work, but only possible – if there is no TFSA room to shelter future profits.

    The first $11,000 of drawdowns will not be tax free because OAS and CPP (about 20% of your working wages) will use up all the 0% room created by the Personal Exemption. Look at the graph showing the tax brackets on the left and typical retirement income for someone earning $40,000 in the middle, and the clawback ranges on the right.


  2. I completely concur to the previous comment on the RRSP Meltdown strategy. Upon multiple calculations I found that the best strategy would be to but an annuity with half of the savings (mostly from RRSP to have the taxable pension credits) and the remaining to spread over 18 to 20 years. I do not concur to the idea of going over 81-82 of age in the calculations. This part of life should be better covered by the downgrading of the living arrangements and moving to old age homes for the last years of the life.


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