Regardless of your asset allocation, every retiree should have a strategy for when they will withdraw money from their accounts, which accounts they will draw from first, and how much they should withdraw every month, quarter, and year.  There are many potential strategies to choose from, and a near-infinite number of ways to customize each strategy for you.  Over the last few editions of this newsletter, we’ve broken down a few of the more common.  This month, let’s look at:

The Proportional Withdrawal Strategy.  If you’re like many investors, you may have more than one investment account.  For instance, a taxable brokerage account, a tax-deferred RRSP or RRIF, and a Tax-Free Savings account.

Traditionally, many retirees would withdraw from their taxable accounts first, then their tax-deferred accounts, and finally the tax free accounts. The idea here is to let the assets in your tax-deferred and tax-advantaged accounts grow for as long as possible.

The problem with this approach is that it can sometimes lead to a heftier tax bill.  In fact, it’s not uncommon for a retiree to avoid touching their RRSP/RRIF until they must begin making withdrawals at age 72…only to find that they have inadvertently pushed themselves into a higher tax bracket.  (This is due to having to pay taxes on the potentially large amount of money they withdrew.) 

For this reason, a proportional withdrawal strategy is worth considering.  With this approach, you would: first determine how much in total you would need to withdraw each year.  Then, you would withdraw a proportionate amount from each account every year, based on their respective percentage of your overall savings.  For example, imagine that the value of your taxable accounts represents 30% of your overall savings, your RRSP/RRIF is 50%, and your TFSA equals 20%.  Since you need to make $35,000 in total withdrawals each year, you would withdraw roughly $10,500 from your taxable account, $17,500 from your RRSP/RRIF, and $7,000 from your TFSA.  This approach would spread out the tax impact of your withdrawals, and potentially lead to a lower overall tax bill each year. 

Now, this strategy requires a lot of thought and calculation, and it’s not right for everybody.  But if taxes are a major concern for you in retirement, it’s certainly an approach worth considering! 

Next month, we’ll look at a withdrawal strategy that’s a little simpler to understand: the guardrails strategy.