Thursday, March 9, 2017

Retirement Spending Plan Question

Reader P.H. asked me a challenging question about drawing down TFSAs, RRSPs, and non-registered accounts during retirement. Here is a lightly-edited version of the question:

Over the RRSP season I had the same conversation with both my father and father in law about RRSP withdrawals. It was over which account they should tap first, their RRSP or non-registered (everyone agreed to leave TFSA until they end and to max it out forever.)

I understood that non-registered accounts should be used up first and then RRSP so that you pay less in investment taxes over time. They think they should draw out RRSP money first or even draw extra money they don’t need immediately and invest it in non-registered account so they pay less income tax over time. I tried to explain that they would have more money if they waited, but both were concerned about the 50% income tax their estate/heirs would have to pay when they died.

After some back of the envelope calculations I think we are both right. I think they would have more money for themselves to use if they did RRSP last, but they could leave a larger inheritance if they took out extra withdrawals and invested it in a non-registered account.

So, my conclusion to them was that if they wanted to make the most out of their money for their own use then leave it in the RRSP, but if they plan to leave an inheritance then they can take extra out earlier.

Does this make sense?

Love the blog.

First off, I’m glad you enjoy the blog.

I’ve thought a lot about this type of question, and I don’t claim to have a definitive answer that covers all situations. I’m not even completely sure about my own situation yet.

In all the simulations I’ve done, going with the order non-registered, RRSP/RRIF, and finally TFSA has been either optimal or not too far off optimal. But I don’t claim to have looked at all possible financial situations people find themselves in during retirement.

There are so many variables involved, including the amounts you have in each type of account, other income you have, your year-to-year cash flow needs, and whether you are married. Other important factors that you can’t know are how long you and your spouse will live and what future changes the government will make to the tax system.

A change that seems likely at some point is to take into account TFSAs when giving out government benefits. I don’t think Canadians would be too pleased to see people with massive TFSAs collect GIS and other government money intended for low-income seniors.

A strategy I’ve read in a few places is to “top up” your current tax bracket. For example, in Ontario, the marginal tax rate on income below $42,201 is 20.05%. If your income is a little below this level, this strategy would have you withdraw enough from your RRSP/RRIF to top up this bracket. If you’re going to withdraw early from your RRSP/RRIF, then this makes some sense, but it doesn’t answer the question of whether you should be making such withdrawals early at all.

The father and father-in-law in P.H.’s question both focus on the large tax bill from their RRSP/RRIFs when they die. This is understandable, but may not give the correct conclusion. It’s often the case that you can withdraw RRSP/RRIF funds at a lower tax rate today than you’ll pay later on with a huge withdrawal at death.

But comparing tax rates isn’t the only thing you should consider. There is value in deferring taxes on investment gains as long as possible. Let’s consider an example to illustrate this point.

John is 65 and is currently in a 30% marginal tax bracket. He is considering withdrawing $5000 from his RRSP, even though he doesn’t need the money today. His TFSA contribution room is fully used, and so the $3500 remaining after tax would be invested in a non-registered account.

Suppose that John will live to age 90 and earn pre-tax investment returns of 7% per year. If the money stayed in his RRSP, it would grow to $27,137. Assuming John lives in Ontario and would be pushed into the top marginal rate at death, his heirs would get $12,610 resulting from the original $5000.

In the non-registered account option, suppose that yearly taxes would reduce the growth rate to about 6% per year. Further, he would pay capital gains taxes at death. The final amount going to John’s heirs works out to $11,938. In this example, John was slightly better off leaving the money in the RRSP.

In reality, the calculation would be more complex than this because a higher RRSP balance would actually lead to larger RRIF withdrawals each year. So, the $5000 would not actually stay in the account until John dies. Also, if John had any TFSA room available to hold part of an RRSP withdrawal, the comparison changes.

As for P.H.’s split conclusion about one strategy being better for the retiree and the other better for the heirs, I suspect this just because heirs benefit when retirees spend less. A true comparison comes when we hold retiree spending constant. Keep in mind that forced RRIF withdrawals do not have to be spent; they can be saved in either a TFSA or non-registered account. So, spending the RRSP/RRIF last doesn’t mean the higher forced RRIF withdrawals must be spent.

This whole area can get quite complex. For myself, I’m going with the idea that I don’t have to get the best answer, just a good one. My core plan is to spend non-registered money first, RRSPs second, and TFSAs last unless I get new information. However, I can see the logic of making early RRSP withdrawals if I can get the money out close to tax-free in a year where my income is very low, particularly if I have TFSA room to hold some of the withdrawal.


  1. Great post Michael. Detailed analysis on a complex and relevant topic presented in an easy to consume manner. Bravo!

    1. @Returns Reaper: Thanks, glad you liked it.

  2. Good analysis! I would like to add that for the very few of us who retire early, and who defer CPP and OAS to age 70, that it makes sense to spend RRSP/RRIF at least up to the zero tax bracket. For a couple aged 65 or over, this can be us much as $40,000/year.

    1. @Garth: What you say is likely true for buy-and-hold investors, but there are investors whose investment approach is so tax-inefficient that they're better off leaving money in their RRSP and paying 50% tax at death than they are to withdraw the money from the RRSP tax-free and invest it in a non-registered account. It comes down to whether a few decades of tax drag add up to more than the 50% tax. I have little doubt that this concern doesn't apply to you or me. But those who roll over their stock picks every few months can generate huge tax bills.

  3. I agree with your conclusion, MJ.

    My plan is similar simply because I'd like to have the extra years of non-taxable compounding in the RRSP.

    1. @R: Making an exception to the spending non-registered money first comes down to whether I think the tax drag for my remaining life is less than the difference in RRSP withdrawal tax rate between now and death. Most of the time I expect not to be making an early RRSP withdrawal.

  4. This is truly a difficult question with many unknowns and many different situations that change the answer.

    A situation not discussed so far is somebody who does not intend to leave any inheritance but also needs to take care to not run out of money. In this case they may spend less early in retirement and ramp up spending later as life expectancy becomes more certain. The lower tax rate early in retirement may mean it makes sense to withdraw from RRSPs before taxable investments.

    1. @Greg: I consider sustainable withdrawal rates to be a separate question from what order you should draw down your different types of accounts. But they are clearly related. I've written about withdrawal rates in the past (see the spreadsheet link in the article below).

      Having watched family members try to manage their money, I can tell you that life expectancy doesn't become more certain as you age, at least not in one important sense. If you're 85 and have $100,000 left, should you spend $20,000 per year assuming you won't make it to 90, or spend $6000 per year in case you make it past 100? Having less money left magnifies uncertainty even if the standard deviation of remaining life has dropped.

      I agree with you that it makes sense to spend less in early retirement than many advisors recommend.

    2. @Greg If you truly have no desire to leave an inheritance, and would like to be sure that you die broke, while still safely spending the most you can, then you should defer CPP and OAS to age 70 and possibly even annuitize the remainder of your nest egg after reaching age 70 or so...

    3. @Garth: I've concluded that deferring OAS and CPP to age 70 is the right choice for me. Annuities are a more difficult decision. They force you into a world of high fees, bond-like returns instead of stock-like returns, and lack of inflation protection. I suspect it makes sense to annuitize some fraction of assets after some age to get mortality credits, but I haven't formed any solid conclusions.

    4. Agreed that annuities a way to ensure you don't run out of money, though that kind of certainty has a pretty high price. I'd consider an approach that guarantees enough income to cover necessities (food, shelter, healthcare) through a combination of CPP, OAS, defined benefit pensions, and annuities if necessary later in life when going back to work isn't an option. And just take market risk to fund wants and luxuries.

      Spending too more always increases the likelihood you'll run out of money. If you are 85 you probably shouldn't spend more than 12% of your savings per year. At 85 18% is probably OK.

      I plan to use a mortality updating approach. At any age, you can consult mortality tables to see how many more years you are likely to live. For example, based on US data, if you are 85 there is a 10% chance you'll live more than 7 more years, at 95 it's 4, and at 100 it's 3. You can use this likely number of years remaining to index into a baseline likely safe withdrawal rate. Backtesting shows that with 7 years a withdrawal rate of 11% is safe 90% of the time, with 3 years it's around 22%, and not surprisingly it converges on 4% as the number of years remaining goes beyond 25.

      You can adjust the baseline withdrawal rate up and down based on how comfortable you are with risk, expected return on your investment asset mix, how high market valuations such as CAPE are, and how your health is relative to average.

    5. @Greg: I agree that at some point it makes sense to put roughly the amount you have in fixed income into an annuity. The challenge is to decide what age to do it and how much the payments should increase each year as a partial offset of inflation.

      I suggest you try simulating a long life with the plan you describe. You'll find that your spending will decline slowly in the middle retirement years and start to decline faster in later years. If you make it to 100, your spending will be quite a bit lower than it was a couple of decades earlier. This probably isn't too bad if you've got an annuity with payments rising every year to go along with the investments. However, it may not be much fun if the annuity payments are eroding with inflation and your nest egg is shrinking badly.

  5. Hi Michael, this is PH. Thanks for answering my question. I have a few thoughts about your example.
    If I was John, the 90 year old, or his heirs I would much rather have the $27,000 inside the RRSP than the $12,000 outside even though they came out close the the same if John was to die at 90.
    The reason is that he may not die at 90. Lets say John needed an unexpected new roof for $12,000. It would use up all the money outside the RRSP but only $17,000 of the money inside the RRSP at a 30% income tax rate. Both the heirs and John would have more money if he happened to die the next day.
    I suppose that if you could know exactly what your expenses were going to be you could figure out a way to maximize the RRSP withdrawl, but with so much uncertainty I think it would be better to use RRSP accounts last.
    So, in the end... I agree with you.

    1. @PH: Even if using the RRSP last is the right answer for John, focusing on the huge tax bill at death can be troubling. If John focused on this tax bill, I'd ask him to imagine paying some taxes every year on non-registered assets instead. Many years of these taxes can easily amount to more than the one big tax bill at the end of life.

    2. Thinking it over again. Best case is that John takes out extra in the few years just before he dies to get the benefit of a lower tax rate, but doesn't loose too much in investment taxes. I guess the minimum withdrawals should force us to do this anyway.

    3. @PH: John could certainly do a much better job of minimizing his taxes if he knew when he was going to die. But he doesn't. So, he has to make the best plan he can taking into account the longevity uncertainty.

    4. This s quite a dilemma, and one I am currently grappling with. I am 64, soon to turn 65. The compounding calculators I use are showing me that when I'm about 85 years old, I will have a good size portfolio, huge (for me) minimum RIF withdrawals, and a large income tax obligation. This is not what I want: to be a well-off old lady with huge tax bills, and little to no zest for life left to spend my hard earned and hard invested money. If possible, I want to start enjoying the fruits of my labour's now and over the next 5 to 10 years, while minimizing the taxes payable.

      Can anyone recommend a tax professional in Toronto who can work out several of my specific financial (incl. income tax) scenarios, in detail?

    5. @Tall Yogagal: If you're right about projecting a large portfolio at age 85, this calls for spending some of your savings starting now. However, it's hard to tell without specifics, and I'm not holding myself out as an expert to advise anyone.

      I know a few people in Toronto who handle financial matters, including taxes, for high-net worth individuals, but they don't come cheap. If you're just looking for a one-time analysis, I'm afraid I don't know of anyone who makes this his or her business.

    6. True, I need to start spending more. I don't want to die with over a million dollars in my investment accounts. The challenge is how and in what sequence to start withdrawing money from registered accounts.

      I found an article on that I will post a link to later.

      I have also been Googling "tax accountants" and looking at their web sites re what services they provide.

  6. @James: I just revisited your "retirement income strategy" (

    I was wondering if you still keeping up with it.

    You see, me and my wife are both 65 yrs old, and a few years ago I decided to ditch my financial advisor (mainly for the fees). I now manage our portfolios. At both of us, we have 7 accounts: 1 taxable, 2 RSPs, 2 LIFs and 2 TFSAs. The proportion is about 60% stocks (CAD and USD) and 25% bonds and about 15% cash... waiting for a market correction to deploy it :)

    Question: Where do yo find HISA offering inflation rates$ The closest I found was "giving" not more than .75%

    Have you modified your strategies since 2013?

    Are you still "...100% low-cost stock index ETFs..."?
    Would it be possible to share your portfolio ETFs, and percentage in the different sectors? (Maybe you wrote it elsewhere but I couldn't find it).


    1. @JackF: I'm not retired yet, so I haven't made any final decisions. My current plans are to use something close to what was described in that article. I've written other articles where I thought about some modifications:

      My thinking of having 5 years of spending in a HISA (or other fixed income if the returns are better) is based on having everything else in stocks. If you have 40% in bonds and cash, you may not want so much additional fixed income. Another difference from me is that I don't increase my allocation to cash for market timing purposes.

      I'm still 100% allocated to low-cost broad-market index ETFs. You can get more details here:

    2. The highest HISA rate I am aware of is 2% at EQ Bank. There may be other banks or credit unions offering similar.

      Here is one source.

    3. @RBull: Thanks for the information. In my own planning, I assume that fixed-income interest roughly covers inflation (before taxes). So 2% is close to right for now.

  7. I understand why you would withdraw unregistered first. But why would you withdraw rrsp before tfsa? My plan is to withdraw from tfsa second (after unregistered) which would create room to draw down the rrsp money into the tfsa. In your way you are being taxed on the rrsp being withdrawn and then taxed again upon putting it in unregistered.

    1. @Christina D: I'll get new TFSA room each year. That will likely be adequate if I happen to choose to withdraw more from my RRSP/RRIF than I'll spend in a given year.

      I suspect I'll likely be trying to optimize my income level with RRSP/RRIF withdrawals, and then either withdrawing from my TFSA or contributing to it to match my spending needs. If I happen to live a long life, I expect to leave mostly TFSA assets to my heirs. This is more tax-efficient than leaving a big RRSP/RRIF.

  8. This is from Which RRIF strategy is best for clients?

    While I don't quite understand all the numbers in the article's example calculations, it appears that the ideal withdrawal amounts will vary depending on what income tax bracket you're in.

    Quote from the article:
    When discussing with your clients whether they should take the new RRIF minimum, an average amount, or perhaps an even greater amount, factors to consider include:

    -estimating the duration of the RRIF;
    -personal tax rates of the annuitant(s) while drawing RRIF income;
    -their estimated terminal personal tax rate;
    -the anticipated rates of return for the RRIF and non-registered accounts; and,
    -after-tax income required to support retirement lifestyle needs.

    It looks like I have more calculating to do.