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What is the Goal for Decumulation?

I recently wrote that “this is my 8th year of drawing down my RRSP.”  To explain why I do this, even though I’m not even close to 71 yet, I wrote “to reduce lifetime taxes.”  A commenter observed that this isn’t the right objective, which is true enough.  What I wrote is conveniently short, but not accurate.  My real reason for melting down my RRSP early is surprisingly challenging to define.

Reducing lifetime taxes

Some people claim that minimizing taxes really is their true objective, but I doubt this is true.  Going all in on this goal would mean quitting your job and giving away all your savings.  There might be some taxes in the short term, but after that, you’d never pay any income taxes again.

This is clearly not what people mean when they say they want to minimize taxes.  So, the real objective is something else.

Maximizing after-tax consumption

This goal is a little better, but still not quite right.  To go all in on this goal, you would need to stop all spending immediately to build up savings and spend it all very late in life.  As long as you expect your investments to grow faster than inflation, allowing your savings to continue growing leads to more available for consumption in the future.

But, this is a poor outcome.  What good does it do you to starve now so that you can waste millions when you're in your 90s?  This isn’t the real objective.

Maximizing after-tax consumption subject to a preferred spending profile over time

This is getting closer to the mark.  I plan for flat consumption over time.  This means I target the same amount of inflation-adjusted spending each year.  I plan to give money to my sons periodically while I’m alive, so I’m not trying to maximize their inheritance.

I make choices that increase my expected annual inflation-adjusted spending, based on assumptions about the returns I’ll earn, the tax rates I’ll pay, and how long I’ll live.  By drawing from my RRSP now and planning to take both CPP and OAS when I’m 70, the amount I can consume each year goes up.  

This higher annual spending doesn’t just apply to the years after I’m 70.  I’ve been able to safely spend more in each of the past 8 years because of my RRSP meltdown and my decision to collect CPP and OAS at 70.

Risk

My inflation-adjusted spending isn’t actually flat each year the way it is with a strict version of the 4% rule.  I use conservative assumptions about investment returns and longevity to set a spending level, and I recalculate my spending level each year based on the actual results I get.  

So, it’s likely that my inflation-adjusted spending will rise over time.  However, it might fall if I’m unlucky with my returns or lucky with my longevity.  So, there is a risk component to my decumulation goal in addition to maximizing annual spending.  I usually express this as maximizing my safe spending level.

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