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Optimizing Drawdown Strategies


 

Optimizing Retirement Drawdown Strategies


Question: When I run a report, the results under "Income Summary -- Gross Income Breakdown" show drawdowns of specified dollar amounts from Registered Savings and Non-Registered Savings until the depletion of Non-Registered Savings. At that point, a stipulated dollar amount from the Tax-Free Savings Account (TFSA) starts being drawn down to supplement registered savings to reach the desired disposable retirement income. Are these various drawdown amounts stipulated for Registered, Non-Registered, and TFSA drawdowns the optimal strategy for minimizing taxes and Old Age Security (OAS) clawbacks?


Answer: The following summarizes each drawdown strategy and how optimization is applied:


Registered Funds First:

  1. Pre-calculates an inflation-adjusted Registered Retirement Income Fund (RRIF) payment that depletes the fund by the life expectancy year, and an inflation-adjusted Life Income Fund (LIF) payment that depletes the fund by age 90.

  2. Takes these pre-calculated payments yearly until the funds are depleted.

  3. Increases RRIF and LIF payments if they fall below their minimums.

  4. Draws additional non-registered funds if needed to reach the target income.

  5. Draws from the TFSA if necessary to meet the target income.

  6. Withdraws additional LIF funds up to the maximum.

  7. Draws extra RRIF funds above the pre-calculated level.


Non-Registered Funds First:

  1. Takes minimum RRIF and LIF payments.

  2. Withdraws additional non-registered funds to reach the target income.

  3. Draws additional LIF funds above the minimum (up to the maximum).

  4. Withdraws extra RRIF funds above the minimum.

  5. Uses TFSA funds if necessary.


Tax-Free Funds First:

  1. Takes minimum RRIF and LIF payments.

  2. Withdraws extra non-registered funds if needed.

  3. Uses TFSA funds to reach the target income.

  4. Draws additional LIF funds up to the maximum.

  5. Withdraws extra RRIF funds above the minimum.


Optimization Approach: The desired retirement income is modeled using each strategy above, and the strategy maximizing the net estate value at the life expectancy year is chosen as optimal. This method minimizes lifetime taxes and clawbacks, considering the time-value of money. For instance, if $5,000 in tax can be paid now or $10,000 in 20 years, it's advantageous to defer taxes if investments can yield over ~3.53% annually in a tax-free vehicle.


Optimizing this way accounts for probate and terminal taxes, not just income taxes, while alive. This optimization involves choosing between the three strategies rather than recalculating annually, which would involve a much larger solution space.


Keywords:

Retirement Drawdown, Tax Minimization, Old Age Security Clawback


 

For more information or to clarify any questions about using the Milestones Retirement Insights tool for comprehensive retirement income planning, reach out to us at info@milestones-retirement.com 

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