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Understanding the Order of Asset Withdrawal in Retirement Strategies


Question: I have a client who ONLY has RRSP assets (in this case, very large RRSP assets). No N/R, no TFSA. I need help in understanding why, in the case we only have RRSP assets, why the registered funds first strategy is the worst option. And also, what does the software do with the other two strategies when there are no non-reg or TFSA assets. This is the 3rd time this has occurred, so I need to better understand this. I know for these cases, that the “order of asset withdrawal” is not an issue, but I think advisors still want to see what results occur in terms of maximum income, estate values etc.

Answer: In the Non-reg first strategy, the priorities for income creation from the client’s accounts are as follows:

  1. Minimum RRIF and LIF payments as required by law, requested Corporate withdrawal

  2. Non-Registered withdrawals

  3. Additional LIF withdrawal up to the maximum

  4. Additional RRIF withdrawal

  5. TFSA withdrawal

  6. Additional Corporate withdrawal

  7. Notional Line of Credit

So each year, there is some disposable income target (either provided by the user or determined by solve max + any relevant additional income needs for that year). The calculator takes all the “guaranteed” or “determined” income streams for the year (CPP, OAS, Pension, Custom sources, RRIF Min, LIF Min, Requested Corporate withdrawal) and calculates the resulting disposable income. If the resulting disposable income is above target then great we’re done creating income and we put any excess back into our savings. If the resulting disposable income is below target, then we need to take an additional withdrawal and work our way down the priority list starting at point 2.

We would start by taking a Non-reg withdrawal to get up to the target. If there is no Non-reg account or not enough in the Non-Reg account to reach the target, we take everything that is in Non-Reg and then look at the LIF account. We try increasing the LIF payment to reach the disposable income target or when it hits the LIF maximum, whichever comes first. If there is no LIF account or increasing our minimum LIF payment to maximum LIF payment still leaves us below the disposable income target then we look to the RRIF account.

We take excess RRIF money above the minimum RRIF payment until we reach the disposable income target. If there is no RRIF account or taking all the RRIF money still leaves us below the disposable income target we look to the TFSA and do the same, and then finally to additional corporate withdrawals. When all accounts are depleted we start generating income using a notional line of credit to estimate how much debt a certain income need and strategy combination would create.

The Reg-First strategy changes up the priorities a bit to:

  1. Calculated RRIF and LIF payments as required by law, requested Corporate withdrawal

  2. Non-Registered withdrawals

  3. TFSA withdrawal

  4. Additional LIF withdrawal up to the maximum

  5. Additional RRIF withdrawal

  6. Additional Corporate withdrawal

  7. Notional Line of Credit

The process works the same as above but using a new priority list. The main difference is rather than starting with minimum RRIF/LIF payments, the Reg First strategy starts with calculated RRIF/LIF payments. These RRIF/LIF payments are calculated to deplete the RRIF by statistical life expectancy and the LIF as early as possible (age 90 for many provinces).

The payments calculated in this way are guaranteed to be above the minimum each year meaning this strategy is a more aggressive drawdown of registered money since it is essentially imposing a minimum withdrawal each year that is above the legally mandated minimum in order to guarantee the aforementioned depletion timelines of the RRIF and LIF.

We understand why this would be confusing and you are certainly not alone. It’s basically a labelling issue. The label “Non-Registered Funds First” does not accurately describe what is happening under the hood, and these labels need to be changed.

For now, I’ve attached a document we prepared explaining the process of calculation for each strategy. Each of the three strategies has its own rule sets for the priority of deposit and the priority of withdrawal. Quite simply, your scenario is most efficient under our second strategy's unique rules set, and just happened to label that non-reg funds first.

Review the attached and 1) let me know if it sheds some light on the confusion, and 2) think about strategy labels that would cause less confusion for Mackenzie advisors/customers. We’re putting a lot of thought into this right now, but if Mackenzie would like to shape its version, you would have that opportunity to do so.

For example: Registered Funds First = Registered Melt Down Strategy, Non-Registered Funds First = Hybrid Strategy, Registered Funds Last = Maximum Tax Deferral Strategy

Keywords: RRSP assets, withdrawal strategies, Non-Registered Funds First strategy, Registered Funds First strategy


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