As we explained during Part 1 of this blog series, structuring retirement income is a perennial challenge for those wishing to protect their standard of living when they stop working. We referenced a webinar hosted by Guardian Capital LP, designed to discuss and determine the proper spend rate for retirees.

The webinar was led by Moshe Arye Milevsky, a professor at Schulich and a member of the Graduate Faculty of Mathematics & Statistics at York University.

Optimal Decumulation

The Holy Grail of a retiree spending rate can be summed up, according to Professor Milevsky, as optimal decumulation.

So, rather than deploy the simplistic 4% sustainable withdrawal rate projected over a 30-year period which most retirement income planners traditionally rely on, Professor Milevsky recommends an alternative driven by – among others – the following considerations:

  • Do you have a pre-existing pension income? And, if so, from what sources?
  • How longevity risk averse – the risk that you will live longer than your resources can adequately fund – are you?
  • How does the so-called Fisher Equation – which connects the relationship between real interest rates, nominal interest rates, and inflation – impact your projections?

Much of this sounds troublingly technical – and it is – so rather than overload you with complex calculations, let’s cut to the chase.

Sources of Retirement Income:

For most of us, the bulk of our pre-retirement income comes from either a salary from an employer or – if you have one – income from your business. Income in retirement will come from a variety of sources including government benefits, such as the Canada Pension Plan (CPP) and Old Age Security (OAS).

These funds will be supplemented – perhaps – by pension payments from an employer pension plan and – quite likely – withdrawals from your investments and other retirement assets such as RRSPs, TFSAs and non-registered accounts. That’s it.

Traditional Withdrawal Strategies

The rule of thumb is that you should draw from your non-registered accounts first until they are exhausted. After that, you access your TFSA investments and finally systematically withdraw funds from your RRSPs.

The goal is to defer registered account withdrawals – and thereby defer taxes – so your investment pie stays bigger for longer. Two changes were introduced by the federal government that have modified the tax burden for all of us later in life:

  1. In 2007, pension income splitting was established. If you’re 65 years of age or older you can split up to 50% of your RRIF income with your spouse or common law partner for tax purposes.
  2. In 2015, the prescribed percentages for RRIF minimum withdrawals were reduced resulting in lower required RRIF payments than in the past.

Go-Go, Slow-Go, No-Go

One of the principal observations made by Professor Milevsky was that

…not all retirees experience a flat profile of spending in retirement. Spending habits and spending needs change over time.

Although he didn’t use these expressions, what Professor Milevsky suggested was that retirement income spending generally declines as we age. There are three stages: your Go-Go years, your Slow-Go years and, finally, your No-Go years.

What tends to happen is that while housing costs remain steady and health care expenses inevitably increase, nearly every other category of spending – transportation, entertainment, clothing, food and drink – decline.

Planning your retirement around the Go-Go, Slow-Go, No-Go spending pattern does require a higher level of risk tolerance, plus discipline. You can’t just go on autopilot. You need to track carefully how much you’re spending and be prepared to make adjustments along the way if necessary – and that’s where your financial advisor can make an important difference.

Deciding how to structure your retirement income may feel overwhelming, but it doesn’t have to be. Consider a conversation on this topic with one of our trusted partners at Coastal Community Credit Union, Coastal Community Private Wealth Group, or Interior Savings if you haven’t already sought out professional advice.