Make $900,000 Last in Retirement

Nearly two-thirds of Canadian pre-retirees don't have a retirement withdrawal plan.  

On this episode of the Canadian Money Roadmap, Evan and Sam use a case study to show how optimizing your withdrawals during retirement can have a significant impact on your available investments and estate projection. 

YouTube Link: https://youtu.be/6flzb8rwtP4

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Transcript

SPEAKER_00 0:00

63% of Canadians approaching retirement don't actually have a withdrawal plan for those retirement years. And why is this significant? It's significant because the way you withdraw from your accounts can have a huge impact on your retirement income, the taxes you pay, and your estate value at the end of the day. So today, Evan and I are going to get into a case study that explores retirement withdrawal and some of the key strategies to think about when you approach that time.

SPEAKER_01 0:26

Sam, it was like Christmas morning here recently with the Fidelity Retirement Report coming out. There's so much interesting information in there, you know, for our clients and the people that we talked to on this podcast. One of the things that stood out to both of us was that withdrawal strategy that people just generally don't have, you know, a lot of thought put into their decumulation years. Everything is so focused around the accumulation and how to optimize this, that, and the other thing. But this is where financial planning can really add a ton of value to people just based on where they withdraw their money from and create the retirement paycheck. The order of operations in which they do that can really move the needle. You know, income sustainability, how much you leave behind, all sorts of different things like that. And so we've always thought that having a withdrawal order is a critical part of a retirement plan. And so, anyways, we thought we'd go through, you know, some of the scenarios and some maybe some common thoughts and maybe how common ideas maybe aren't necessarily the only thing to consider. You know, when you're looking at forums online and things like that. Rules of thumb, sure, they can they can work and maybe they can still make it work, make your plan work, but can we make it a little bit better? So, yeah, we'll get into some of those here today.

SPEAKER_00 1:42

Yeah, for sure. And it as you're saying, it's so personalized some of these withdrawal plans to each individual scenario. So that's why we want to go into the planning software today and just actually work through a case study that can show some of the key variables that might kind of alter people's optimal withdrawal plans during retirement.

SPEAKER_01 2:01

Okay, so if you're listening to this podcast, just audio, um, maybe head over to YouTube. We'll have a link in the show notes where you can check this one out on YouTube as well. So you can kind of follow along with us. But we will do our best to turn a visual explanation into an audible one here. So, anyways, bear with us uh in that regard. But if you're interested, head over to YouTube and you can find us over there and watch this. Okay, so here we have James and Taylor, and they are 55 years old. They recently retired, so they retired pre-65 a little bit early for the average Canadian. But since they're retiring early, they don't qualify for CPP and OAS yet. We have them slated to collect those at age 65. Again, that's not an optimal choice necessarily, but just for ease of explanation there. But in the meantime, between now and then, they need to rely on their own savings. They each have $250,000 in RSPs and they each have $200,000 in TFSAs. Grand total, $900,000 invested, but between RSPs and TFSAs, they got to figure out where that money is gonna come from in terms of the order in which they withdraw it from to make their money last and maximize the value that they leave behind for their kids. Right now, they need $5,000 a month. That's after tax spending. We have that increasing with inflation along the way, but they don't have any debt, they own their house outright, and so those are the expenses that we're planning for.

SPEAKER_00 3:33

Yeah, and so we've got them investing in a growth profile going forward, and so that's a profile that would return about 5.9% on average, and that's about an 80-20 mix of stocks and bonds. So assuming that they're going to need to continue to make some returns through this these retirement years to make the whole plan work.

SPEAKER_01 3:58

Okay, so some common thoughts around withdrawal order typically suggests that you should spend your RSP money first and defer your TFSAs as long as possible, allowing them to grow tax-free as long as you can. And in many scenarios, that plan actually works out quite well. And so in this case, let's take a look and see how that looks for them. So if we're taking a look at their retirement scenario here, this number over on the side, we're looking for that to be ideally as high as possible, but 100% means that the the projection would show that they've got 100% of the required investments needed to meet that income need throughout their projected life. So in their case, we're a little bit over that here. We've got some retirement cushion of about seven years, some moderate resilience to volatility, but you know, at their age of 55, that's pretty decent. What you're seeing down here below is their available investments, and that declines quite rapidly before the ages where their CPP and OAS kick in. And then from there, they don't need to withdraw nearly as much on a go forward basis. So they can their investment accounts kind of stabilize here over time. So again, if you're just listening on the podcast, we're looking at a chart that goes down and to the right a little bit uh steeply and then levels off from there until their life expectancy closer to age 90.

SPEAKER_00 5:21

So this is, I mean, this is indicative of a plan. You know, that retirement number is at 104%. So it's saying they have a little bit more than they would be expected to need under their current expense uh expenses and things like that. So this is a plan when you look at it that you know it it works, but the question is can we do better if we optimize how we're withdrawing from these accounts?

SPEAKER_01 5:42

Yeah. And so, you know, generally speaking, all we want to show here is that the the standard rules aren't always rules, I guess. This is a good way to lead. It's not always a rule, it's just one way to do it. Uh, because in their case here, again, one thing we should highlight probably is that legacy value. So this is the after-tax value that we would project for the value of their estate, which includes their home, $1.29 million dollars there in terms of money that they're anticipated to leave behind for their kids.

SPEAKER_00 6:12

So let's in this case, sorry, Evan, it would just be basically that's like the value of their home. We're not projecting them to have a ton of ton left over. There would be, you know, a few hundred thousand dollars of investments at the end with the value of their home providing most of their estate value.

SPEAKER_01 6:27

That's right. Yeah. In this case, we would project about $114,000 for investments left over. So, anyways, let's go back and take a look at what a different withdrawal order could look like. So in this case, redeeming their high tax investments, so their RSPs first, the plan seems to work out reasonably well, right? So it's not the difference between making it or not. But what if we flip it around and we redeem their TFSAs first? Well, in this case, things get a little bit better from a retirement readiness standpoint. There's a little bit more retirement cushion there, an extra year that they would project. And so if we take a look at their retirement paycheck, again, we're taking out the TFSA money first, and then registered money here next, and then their uh government pensions kick in, and they keep taking the minimum out of their registered plans. After that, things look pretty good. So, in terms of their cushion and uh, you know, how much they actually need, this is largely based on taxes, right? Because when the taxes show up and how much they need to actually withdraw, you know, all sorts of different scenarios could be at play here depending on espousal situation and how much money they would each have, because you can only split money that comes out of a RIF after age 65. So if there's someone that has more of the money in their accounts and they're retiring pre-65, this could look very different. I'm gonna get in some of those uh scenarios a little bit later. But here, this might be a case where you take a look at this and say, like, actually, we're looking maybe marginally better if we take TFSAs first versus RSPs. But then if you take a look over at the legacy value here, it is marginally lower. Again, these are just projected values over a pretty long period of time, but it is a little bit less just from a projection standpoint here in this case. Now, where things start to get a little bit interesting, again, this is just one scenario. All we wanted to show you is that there's no one way to do things. One thing that makes things a little bit more interesting and quite a bit better across the board is if we do drum roll, please, Sam. Maybe don't actually do a drum roll, we're gonna do both. We're gonna combine them and we're actually gonna do a little bit of both at the same time. So in this case here, if you start out by taking a little bit of registered money, again, pretty much up to the individual tax bracket, you know, so that personal exemption amount for each person, where you can kind of get most of that money essentially tax free, and then you top up your spending need with your tax-free savings accounts after that, so you can kind of meet that objective without paying any tax at all, but without draining your TFSAs entirely, so you kind of get the best of both worlds, right? So once we get it to age 65, we have them converting those RSPs over to RIFs so that those can be split afterwards if needed at all, but then those government pensions kick in, and so you can still do that combination of RIF minimums plus TFSAs because you still have some, right? We're not doing all of one and kicking the can down on the other one. And how does that actually look? Well, in their case, that changes their projected investments. Again, I would say pretty meaningfully here, where the retirement cushion is now projected to be closer to over 10 years in this case, right? So I don't know. I think that's pretty compelling when we're looking at someone's situation. It's like, well, you you could do either one and you're gonna be fine, but how about we just get marginally creative and and just take a little bit out of both of your accounts, and that can really improve outcomes in a situation just like this.

SPEAKER_00 10:18

Yeah, and so we can see that in the the retirement number and the legacy number in the software here. And so going from 104 at the start in the initial situation to 110% is significant as you're mentioning, Evan. You know, that gives a much better retirement cushion and those kind of things. And the legacy number. So under this scenario, the legacy is expected to be about $250,000 more than our the original scenario we went through. And that would pretty much all be made up by just additional available investments at the projected end of life here.

SPEAKER_01 10:49

That's right. Yeah, so we would still project that in this scenario here, they would both have TFSA and RSP values at the end. If I pop over to that legacy screen here again in this scenario, remember those initial investments that they would anticipate passing away as part of their estate at life expectancy, it was right around $114,000. Pretty good, well, get to double that in this case by being able to defer some of the taxes that they would owe on the RSPs and have those values grow. Again, because you spend dollars, you don't spend percentages, right? And so even though you're maybe paying the same rate of tax along the way, you know, conceptually, in this case, because we're able to defer that and have the taxes that you haven't paid yet continue to grow and you can make money on that, that still leaves a pretty sizable portion for them at the end of the day. So I'm pretty compelled in this case to suggest like that that combined withdrawal strategy, you know, even though it doesn't meet the one or the other type of approach that most people take, I think the outcome here is worth taking a look at.

SPEAKER_00 11:58

Yeah, and I guess the next question, we often go to the stress testing and the volatility analysis in our planning, but it's worth looking at those metrics in relation to these different scenarios as well. Because I think, you know, that's a key consideration when considering how the withdrawal plan affects the kind of long-term financial outlook.

SPEAKER_01 12:17

For sure. And so I'm going to be running that here right now in the what we've probably called the optimal scenario. And in this case, it's not perfect. There's very few perfect plans in this case, especially because the couple is 55. But if we look out to their age 90 life expectancy, in this case, what we just did here, just so you know, is like we're running a thousand different simulations of what the market could do in any given year. So we we bake in some volatility rates based on the actual portfolio that they have. And in this case here, you know, in a thousand different simulations, at their end of life, 649 of them, they still have money left over at the end. So again, it's not 100% of the time necessarily, but it's a pretty good situation where 65% of the time they would still have some investments left over. Again, they don't run out of income in that case because they still have CPP, they still have OAS, things like that. But let's flip this around and let's just look at the the RSPs, where again, most people would suggest they should take the RSPs first, kick the TFSAs down the road. Again, it works. The plan works in general, but even when we stress test it here, you can already start to see that the uh the number of successful outcomes in our simulations are quite a bit fewer. So, you know, at age 90 here, in this case, it's down to 56.6% of the time, they still have money left over. So it gets down to a little bit more of like a coin toss, right? And so I I think this is important to take a look at so that people can kind of make an informed decision on how their specific circumstance could play out in the real world.

SPEAKER_00 13:58

Yeah, and I think seeing the volatility analysis is a pretty compelling reason to try to optimize this withdrawal strategy, and in this case, a prorated strategy works best, but trying to diminish the volatility that is caused by the withdrawal strategy while increasing kind of the ultimate available income in retirement, but also the long-term projected estate value is what we're going for. And in this case, the prorated approach seems to be meaningfully better.

SPEAKER_01 14:21

Okay, so that was just one look at one hypothetical couple and their scenario, like even though it it looks like anyone's you know, personal circumstance at the margins, that's where it actually matters. Like the devil's in the details with these things, of course, because we we talked about CPP and the fact that they wanted to take it at 65. Had they really pushed to take it at 60, or had they been open to deferring it to age 70, these different scenarios might be the difference between, you know, a successful retirement or you know, the choice between any number of different withdrawal orders being completely different as well. So everything works together, and in some cases they work against each other depending on the different variable. But when we look at your plan holistically, we're trying to optimize for a number of different things at the same time. So what we all we were trying to do is keep everything the same in this case. But taking a look at all those different variables as they work together really matters. So again, this scenario was just based on them taking those government benefits rate at 65. Now, if they had dollar amounts in their investment accounts that were a different ratio, maybe they only had RSPs, maybe they only had an RSP in one of their names, maybe they didn't have RSPs at all, and it was just TFSAs, but they had invested really aggressively and they had much larger, you know what I mean? Once they have non-registered investments with taxable capital gains that they haven't incurred yet, you know, the order in which you do that, that starts to matter too, and that gets a little bit more complicated. So we're just looking at kind of like the two-horse race here of the RSP and the TFSA, trying to make it simple for for a podcast scenario. But for many people that have sizable investments closer to their retirement years, this actually gets really complicated. And then once you start factoring in one-off expenses of like, oh, we actually want to do this major trip in three years and we want to bring all the kids out to Europe and we're gonna stay in this place in Italy and you know, all these scenarios, where does that money come from? And if you don't want to do those things, that looks different. If you have an annual trip that you want to do that has some one-offs and whatever, if you're single, like all these different situations really matter when it comes to building your withdrawal plan. And so the fact that we saw whatever that number was, it was in the high 60s of percent of people that don't have a withdrawal plan yet, it's kind of concerning in a way, right? Like it at well, at at the worst, but at best, it's just a missed opportunity.

SPEAKER_00 16:53

Yeah, for sure. I think that's I like that positive spin a bit more, you know, like this is another another opportunity. But I think stepping back, it's important to think about this and incorporate this withdrawal strategy into your retirement plan because it can make a significant difference. But it's totally fair that people are more focused on actually compiling the money necessary to get there. But so that's where getting this holistic retirement plan together can kind of bridge those things and allow that transition from pre-retirement into retirement to be a bit more seamless and smooth if you do have those working together and in tandem.

SPEAKER_01 17:27

Mm-hmm. And we found with you know people that have filled out our scorecards or just general anecdotal evidence of how people think about retirement planning. Most people think about retirement planning as saving some money into an RSP every month. It's like not quite. You know, that's that's part of the accumulation years for sure. And a good retirement plan takes a look at some of this stuff and takes a look at what types of withdrawal orders could work in your scenario and how much of an impact they're gonna have on a number of other variables in your situation, right? So, you know, this is why we kind of developed our Cedar Point Pathway Retirement Planning Service that looks at things beyond the investment portfolio, right? So we're taking a look at yes, how to accumulate investments for your last few years, but then once we get there, how do we flip that switch from saving to spending and doing it in a way that's tax efficient, but also optimizes for what you want? Either that's estate value or maximizing spending or flexibility for one-offs that you may or may not want to do throughout your retirement years, right? So that's just one factor. The stress testing, sure, that's we took a look at some volatility, you know, scenarios, but we also can take a look at a number of other specific stress tests within that. And these are all things that you have to be considering so that you don't have to worry about it after the fact, right? Having a plan for your retirement years before you get there can make all the difference for how you feel about it, but also just that straight financial capacity to be able to retire in the first place.

SPEAKER_00 19:05

So yeah, doing that, like having that a projected withdrawal plan sooner rather than later can also inform some of those decisions as you lead up to it. So where's where is some of the savings going? All these different things can be informed by a longer-term plan for like the order in which these assets are going to be withdrawn and things like that. So it does all play together. And the sooner you can get that withdrawal plan in place, the better off you'll be to allow those things to work more effectively together.

SPEAKER_01 19:32

For sure. Like we we've often talked about, you know, starting the way that you want to finish, right? So if you want your plan to look a certain way, accumulating in the right way in the right order and whatnot can make a whole lot of sense for you there, too. So, anyways, hopefully this was a helpful look at some of the unconventional ways that you can withdraw from your portfolio in retirement. We didn't get too creative here, but just showing it's not always this or it's always that, sometimes a combination can work really well. But the main objective here is to you know show that it's a personalized approach that is worth considering, and it can really be a missed opportunity for people if if you don't take a look at your withdrawal order before you get to your retirement years. So if this looked interesting to you and you're interested in a customized financial plan that focuses on your retirement, head over to the show notes wherever you're watching this or listening to this podcast, and we would love to chat with you about how that could look like to work with us. But thanks so much for listening to this episode of the Canadian Money Roadmap, and we will catch you next week for another episode. Take care. The contents of this podcast do not constitute an offer or solicitation for residents in the United States or any other jurisdiction where Evan Newfeld, Cedar Point Wealth, or Sterling Mutuals is not registered or permitted to conduct business. Mutual funds are provided through Sterling Mutuals Inc. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. Mutual funds are not guaranteed, their values fluctuate frequently, and past performance may not be repeated. Financial planning services are provided by Evan Niffeld through Cedar Point Wealth and are not the business of or monitored by Sterling Mutuals Inc.