Q.

I am a DIY investor and have had good investment returns managing both my portfolio and my wife’s. We both have separate

registered retirement savings plans

(RRSPs),

tax-free savings accounts

(TFSAs) and non-registered investment accounts but we have many of the same equities in these. We are invested 90 per cent in equities, 10 per cent in cash (no fixed income) and a 50/50 split between Canadian and U.S. investments. I would like to retire in the next few years and would like to know two things:

  1. The best way to draw down money, given that my wife is 10 years younger than me and still working. I am 56 years old and she is 46;
  2. Should I adjust to a more conservative mix of investments even if my wife has a longer timeline or should I go by my timeline? —Thanks, Michael

FP Answers:

Hi Michael. It sounds like you have done a terrific job accumulating money but as you are realizing, spending it can be more challenging. Ideally, you want to be in a situation where you can comfortably spend your money knowing you and your wife will never run out or leave too much behind wishing you had done more while you could. Your question is focused on the technical aspects of creating a spending plan which is what I will deal with.

To create a sound

retirement spending plan

you need a good understanding of the different puzzle pieces and how they fit together over your lifetime. That includes taxes, investment accounts and their characteristics, government credits and benefits, and your spending pattern.

You have three different types of investment accounts, each with their own characteristics. Money accumulates tax-free inside a TFSA, RRSP and

registered retirement income fund

(RRIF), but TFSA withdrawals are tax-free whereas RRSP and RRIF money is 100 per cent taxable on withdrawal. Plus, RRSP withdrawals are subject to withholding tax, and in some cases fees, whereas there is no mandatory withholding tax on minimum RRIF withdrawals, which gives you more control on the tax you pay. Finally, you can split RRIF income with your spouse starting the year you turn 65.

Your non-registered investments will be subject to interest, dividend and capital gains tax as earned. You cannot split this income with your spouse. This tax and the tax you pay on RRSP or RRIF withdrawals may impact your government tax credits and benefits. TFSA withdrawals will not affect credits and benefits.

At age 60 you will decide if you want to start receiving

Canada Pension Plan

(CPP) income or delay it to any future date before you turn 70. At age 65 you will have the same decision to make with your

Old Age Security

(OAS). A factor influencing that decision will be whether your projected taxable income is too high and you will lose some or all your OAS. It may be possible to lower your taxable income by making your non-registered investments more tax efficient, or adjusting which accounts — RRIF, TFSA or non-registered investments — you spend from.

Your anticipated retirement spending pattern will also impact which accounts you draw from and when you start CPP and OAS. Different spending patterns often point to different solutions.

Without your numbers I can’t provide direct advice. However, if you work through this systematically (and then fine tune), start by deciding which accounts to draw from first. A common approach is to start with non-registered or a combination of non-registered and RRIF withdrawals. You are depleting the non-registered taxable money and drawing money from your RRIF at lower tax rates.

Once you know you are going to take a regular income from your RRSP it makes sense to convert it to a RRIF. In your case, base the minimum withdrawals on your wife’s age.

Next, determine when you should start drawing from each account. For example, if you are delaying your CPP and OAS, does it make sense to draw more from your RRIF over that period? If you have a large expense or if your spending pushes you into the next tax bracket, consider adding draws from your TFSA to keep you in a lower bracket. If you have children and want to maximize your estate, you may be fine with paying the higher tax and keeping money in your TFSA.

Once you have decided when to start your CPP and OAS go back and check if your decisions around which accounts to draw from, and when, still make sense. This is when you will start to fine tune. The actual fine tuning is done year by year when you have a better sense of your upcoming spending.

Consider topping up your TFSA each year with your non-registered money to get it tax sheltered. If your estate is not a concern it probably doesn’t make sense to draw extra from your RRIF to top up your TFSA.

Should your portfolio be more conservative? Think of it this way: you need some safety to preserve your capital for near-term spending needs and equities for potential inflation protection. Assuming you will be spending five per cent of your total portfolio, then with your current mix of 90 per cent in equities and 10 per cent in cash you have about two years of income protected against market drops. Are you comfortable with that? Your response may depend on the total amount of money you have, your investment experience and a few other things. Do you need that money in the stock market to meet your goals? You don’t want to retire and worry about money and markets.

Congratulations on your pending retirement.

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Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.