Structuring your retirement income — the mystery of decumulation

By ATB Financial 28 January 2022 4 min read

Retirement is something most of us spend years looking forward to, but approaching retirement can be stressful for many. How will you spend your time? Are you ready for challenges that may arise in this stage of your life? How will you adjust to life without work? Having confidence in the financial decisions you have made can go a long way in providing peace of mind for the many other decisions that you may be facing.

One of those financial decisions is how to structure your retirement income. For many individuals, the majority of your pre-retirement income will have come from either a salary from your employer or income from your business. Now your 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), maybe pension payments from an employer pension plan, and ultimately, withdrawals from your personal investments.

Many retirees will hold retirement assets in RRSPs, TFSAs and non-registered accounts. The decision of which one to withdraw from first or if you should be withdrawing from a combination of these accounts can be daunting but it doesn’t have to be.


Withdrawal strategies

The rule of thumb is that you should draw from your non-registered accounts first until they are exhausted, then access your TFSA investments, and finally withdraw from your RRSPs. This is often referred to as the “traditional approach.” In most cases, this traditional approach of deferring registered withdrawals as long as possible is the most beneficial way to access the assets. By deferring taxes, your investment pie stays bigger for longer.

If instead, you withdraw registered assets sooner, your total investments will be less as you would need to withdraw more from a registered account to provide the same level of after-tax income. As a result, you’ve depleted more of your savings sooner than necessary and have less investments growing on a tax-deferred basis. So, although you may pay less tax in your later years, and may even pay less total tax, you may not be better off. Ultimately, your goal should not be to minimize tax, but rather to maximize your retirement income and estate value.

Still skeptical? You’ve heard the horror stories from retirees past? In reality, for previous generations this traditional approach was more punitive than it is today. Two changes have been introduced by the government that have since alleviated some of the tax burden later in life. In 2007, pension income splitting was established. If you are 65 or older you can split up to 50% of your RRIF income with your spouse for tax purposes. As well, recognizing that life expectancies were increasing, the government lowered the prescribed percentages for RRIF minimum withdrawals in 2015, resulting in lower required RRIF payments than in the past. These two changes mean your tax burden in your golden years may not be as bad as you think.

That being said, the traditional approach may not be the best approach for everybody. Another school of thought suggests an integrated approach of initiating withdrawals from tax sheltered accounts earlier to take advantage of lower tax rates when they are available, or topping up income to the top of your current tax bracket to create a smoother, more consistent taxable income.


Comparison of the strategies

Let’s take a look at a typical example. Stephanie and Michael are 62 and newly retired. They are wondering if they should be taking some of their retirement income from their RRSPs now, before forced withdrawals are required at age 72, as they don’t want to pay higher tax when they are older, have their Old Age Security (OAS) clawed back, or have their estate worth less as a result of taxes on the registered assets at death. They require a combined annual income of $95,000 after tax, in today’s dollars, indexed at 2% payable to age 95. They both will be receiving full OAS at 65. They are currently receiving CPP. Michael’s CPP entitlement is 90% and Stephanie’s is 75% They have a joint non-registered account worth $500,000. They each have $50,000 in their TFSAs. Michael has $400,000 in his RRSP, while Stephanie has $150,000 in hers—plus a pension that pays $20,000 per year. Investments are held in a conservative mutual fund that is expected to earn a 5.55% return annually.

We’ve compared the traditional approach of postponing withdrawals from the RRSP as long as possible, to a more integrated approach of withdrawing $15,000-$20,000 annually from the RRSPs, before the required withdrawals at 72. The results are as follows:

- % of Goal Achieved OAS Clawback Present Value of Taxes Paid Net after-tax surplus to the Estate in today’s dollars
Traditional Approach 106% None $281,486 $155,768
Early RRSP Withdrawals 104% None $314,998 $103,846

With either approach, Stephanie and Michael have sufficient funds to provide the $95,000 after-tax income that they desire. By choosing the traditional approach, however, Stephanie and Michael are estimated to save $33,512 in taxes and have a net estate value that is $51,992 higher than had they initiated early withdrawals from their RRSPs (both figures are in today’s dollars).


Additional planning for retirement income

Regardless of the structure, there are additional planning techniques that can be implemented to lower the total tax from your registered investments. One of which is making sure you take advantage of the pension income credit. The pension income credit is a tax credit that can be used to offset some or all of the first $2,000 of ‘eligible pension income.’ Eligible pension income includes income from employer sponsored pension plans (at any age), or RRIF/LIF income from age 65.



Determining how to structure your retirement income may feel overwhelming but it doesn’t have to be. Meeting with an ATB Wealth Advisor to review your goals and create a personalized financial plan can provide peace of mind that you are on the right path to maximize your retirement savings and giving you the freedom to focus on your retirement lifestyle decisions.


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