Retirement Income for Life

1. The Conventional Retirement Strategy Often Leads to Financial Ruin

Drawing down one’s savings in retirement is something very few retirees do well, even with the help of professional advisors.

The decumulation dilemma. Most retirement planning focuses on accumulating wealth, not spending it. However, turning a nest egg into a sustainable income stream is far more complex and often poorly executed. Many retirees either outlive their money or underspend significantly due due to fear and inefficient strategies.

The 4-percent rule's flaws. A widely accepted strategy, the "4-percent rule" (withdrawing 4% initially, then adjusting for inflation), can be disastrous. The Thompsons, a mainstream couple with $600,000 in RRSPs, followed this rule, paid off their mortgage, and started government pensions early. Yet, facing worst-case investment returns (5th percentile) and unexpected spending shocks:

• Their RRIF was exhausted by Nick's age 81.
• They faced a significant income shortfall for potentially 15+ years.
  This highlights that "doing everything by the book" offers no guarantee against financial ruin.

Spending shocks are inevitable. Retirees often face unforeseen expenses that can derail even well-intentioned plans. These "spending shocks" can range from major home repairs and dental work to family emergencies or medical costs. While many are manageable, they compound the problem of poor investment returns, making a robust decumulation strategy essential.

2. Your Real Spending Will Likely Decline with Age, Challenging Traditional Rules

If you really need that much more income each year, nothing is wrong with it. But if you naturally start to spend less after a certain age, then drawing that extra income is increasing the chances you will eventually go broke.

The spending paradox. Contrary to popular belief and the assumptions of the 4-percent rule, most retirees' real (inflation-adjusted) spending tends to decrease after a certain age, typically in their early 70s. This phenomenon is observed across various income levels and countries, yet it's often ignored in retirement planning.

Reasons for declining spending:

• Changing consumption basket: As people age, their interests and physical capabilities shift, leading to less spending on travel, clothing, and entertainment, and more on healthcare (though Canadian healthcare mitigates this).
• Diminished inclination/ability: Reduced mobility or enthusiasm can naturally curb spending, even if funds are available.
• Increased saving: Older Canadians, surprisingly, save a greater percentage of their income than younger ones, often accumulating significant unspent wealth.

Recalibrate your expectations. Academic studies consistently show this decline:

• Real spending can fall by 1-2% annually in the 70s and 80s.
• One UK study found 80-year-olds spend 43% less than 50-year-olds.
  Acknowledging this reality allows new retirees to spend more in their early, active years without jeopardizing their later financial security, reducing anxiety about future prospects.

3. Enhancement 1: Drastically Reduce Investment Fees for Substantial Gains

When your total expected annual return is just 5 percent or so, you shouldn’t be giving up 1.8 percent in fees.

The silent killer of returns. High investment management fees (Management Expense Ratios or MERs) are a significant drain on retirement savings. A typical actively managed mutual fund might charge 1.8% annually. When expected returns are modest (e.g., 5%), giving up nearly 2% means a substantial portion of your growth is lost to fees.

Passive investing outperforms. Evidence suggests that most actively managed funds fail to consistently beat their benchmarks over the long term. The SPIVA Canada Scorecard shows that over 90% of active funds underperform their benchmarks over a decade. This makes paying high fees for active management largely unjustifiable.

The low-cost solution:

• Robo-advisors: These platforms use algorithms to build and manage diversified portfolios of low-cost Exchange-Traded Funds (ETFs) with minimal human intervention.
• Cost savings: Robo-advisor fees typically range from 0.2% to 0.5% annually, plus ETF costs of around 0.2%, bringing total fees to approximately 0.6% or less.
• Impact: For the Thompsons, reducing fees from 1.8% to 0.6% added nearly three more years of RRIF income, without any change in investment performance. This "no-brainer" enhancement is crucial for all retirees.

4. Enhancement 2: Defer Government Pensions (CPP) to Transfer Risk and Boost Lifetime Income

It is counterintuitive, but in the long run their RRIF assets will last longer if they adopt Enhancement 2 than if they don’t.

The power of deferral. While most Canadians start their Canada Pension Plan (CPP) benefits at age 65 (or even 60), deferring it until age 70 offers a significant, inflation-protected boost. For each year past 65, the CPP benefit increases by 8.4% (up to age 70), resulting in a 42% (or more) higher payment at 70 compared to 65.

Risk transfer and longevity insurance. This strategy requires drawing down personal savings (like RRIFs) more quickly between retirement and age 70. However, the long-term benefits are profound:

• Increased secure income: A larger CPP payment provides a guaranteed, inflation-indexed income stream for life, reducing reliance on volatile investment returns.
• Reduced longevity risk: The risk of outliving savings is significantly mitigated as a substantial portion of income becomes government-guaranteed.
• Improved overall financial security: For the Thompsons, deferring CPP dramatically shrunk their income gap in later years, even under worst-case investment scenarios.

Overcoming common objections:

• "Bird in the hand": The fear of dying early and not collecting full value is irrational; the greater risk is living too long without sufficient income.
• Advisor bias: Some advisors discourage early RRIF drawdown as their fees are asset-based.
• CPP sustainability: The CPP is robustly funded and managed by the CPPIB, making long-term solvency concerns unfounded.
  This enhancement is a powerful, often overlooked tool for enhancing retirement security, especially for middle-income couples with sufficient assets to bridge the early years.

5. Enhancement 3: Strategically Purchase an Annuity for Unshakeable Income Security

What made this possible is that they drew down their risky assets first, meaning the money in their RRIF that was invested in stocks and bonds.

Annuities as insurance. A life annuity, purchased from an insurance company, converts a lump sum into a guaranteed income stream for life. While often unpopular, it acts as a powerful insurance policy against two major risks: poor investment returns and outliving your savings (longevity risk).

Impact on income security:

• Closes the income gap: For the Thompsons, using 20% of their RRIF ($120,000) to buy a joint and two-thirds survivor annuity closed their remaining income gap, providing complete financial security even with worst-case returns.
• Secure income base: This ensures a predictable income from CPP, OAS, and the annuity, reducing reliance on volatile market performance.
• Mortality credit: Annuities benefit from a "mortality credit," where payments are higher because the insurer pools risk, effectively paying out the capital of those who die early to those who live longer.

Considerations and timing:

• Joint & survivor: For couples, a joint and survivor annuity is crucial to protect the surviving spouse.
• Non-indexed: Indexed annuities are often overpriced; it's better to rely on other income sources for inflation protection.
• Low interest rates: Current low interest rates make annuities less attractive, as they dictate the payout. However, waiting for rates to rise is a gamble, and the benefit of risk transfer remains.
• Optimal age: Annuities become more attractive with age (e.g., 75) due to higher mortality credits, but waiting too long exposes you to market downturns.

6. Enhancement 4: Dynamically Adjust Your Spending with a Dedicated Calculator

The big question then is how do you establish how much income you can draw from your savings? Equally important, how do you modify the amount you draw over time if your experience is better or worse than you expected?

The dynamic spending imperative. Even with the first three enhancements, determining the optimal initial income and adjusting it over time is critical. A small miscalculation can lead to running out of money or significant underspending. Static withdrawal rules fail to account for evolving circumstances like market performance or unexpected expenses.

Introducing PERC (Personal Enhanced Retirement Calculator):

• Purpose: PERC is an online tool designed to help retirees and pre-retirees determine a safe, sustainable income level from all sources.
• Functionality: It takes into account your assets, government pensions, and other income sources, and models future income under various scenarios.
• Scenarios provided:
  • Scenario 1: Worst-case returns, without enhancements (baseline).
  • Scenario 2: Worst-case returns, with the first three enhancements (safe income floor).
  • Scenario 3: Median returns, with the first three enhancements (optimistic income potential).
• Guidance: Retirees should aim to draw income between Scenario 2 and 3, adjusting annually based on PERC's updated projections.

Essential for ongoing management. PERC helps translate complex financial data into actionable spending guidance, allowing retirees to confidently manage their income. It's a vital tool for adapting to life's unpredictable financial twists and turns, ensuring spending aligns with long-term sustainability.

7. Enhancement 5: A Reverse Mortgage Can Be Your Ultimate Financial Backstop

If all else fails, a reverse mortgage can provide much-needed income late in retirement.

The last resort (or strategic tool). For situations where all other enhancements and adjustments still leave an income gap, a reverse mortgage on your primary residence can provide crucial liquidity. While often viewed negatively, it's a viable option for homeowners with substantial equity who need to supplement their income without selling their home.

How a reverse mortgage works:

• No payments: You receive tax-free funds (lump sum or monthly payments) without making any regular mortgage payments.
• Stay in your home: You cannot be forced to move out as long as you maintain the property and pay taxes/insurance.
• Limited risk: Your estate will never owe more than the home's value, even if the loan balance exceeds it.
• Higher interest rates: Rates are typically higher than traditional mortgages due to the bank's deferred repayment risk.

When to consider it:

• Income shortfall: To bridge an income gap, especially in later retirement (e.g., 75-80+).
• Avoid downsizing: If you prefer to stay in your home rather than move.
• Lifestyle boost: For those with ample home equity and no strong desire to leave a large inheritance, it can fund a more comfortable later life.
  While not ideal for early retirement or those planning to move, a reverse mortgage offers a powerful solution for maintaining lifestyle and peace of mind in extreme circumstances.

8. The Five Enhancements Provide Robust Protection Across Diverse Retiree Situations

The five enhancements described in Part II put the Thompsons on much more solid financial ground, but their situation was about as simple as it gets.

Adaptability for complex scenarios. The core five enhancements are not just for "mainstream" couples like the Thompsons; they are adaptable and effective across a wide range of retiree profiles and financial complexities.

Key applications:

• Early death: Even if one spouse dies young, Enhancements 2 (CPP deferral) and 3 (annuity) still benefit the survivor by providing a larger, secure income stream, mitigating the financial impact.
• Early retirees: While more challenging (smaller CPP, no OAS, higher asset needs), Enhancements 1 and 2 are even more critical. PERC helps model the trade-offs of working longer vs. earlier retirement.
• High-net-worth couples: Enhancement 1 (reducing fees) is paramount due to larger asset bases. Enhancements 2 and 3 still add value, especially for extreme longevity or market downturns. OAS deferral also becomes more attractive.
• Single retirees: Need about 70% of a couple's income. The enhancements are equally vital, with government pensions becoming a dominant, secure factor in their income stream.
• Pre-retirees: PERC can be used to model future income based on current savings, planned contributions, and projected retirement age, allowing for proactive adjustments.

Managing illiquid assets. For those with complex holdings like rental properties, the strategy emphasizes the need to convert illiquid assets into income-producing ones at the right time to maintain a smooth income stream and leverage the enhancements effectively.

9. Optimize After-Tax Income by Strategically Drawing Down Different Asset Types

Ultimately, the real goal is to maximize your after-tax income, not your gross income.

Tax efficiency matters. Retirees often hold assets in various vehicles, each with different tax implications:

• RRSPs/RRIFs/LIFs: Contributions are tax-deductible, withdrawals are taxable as ordinary income.
• TFSAs: Contributions are not deductible, but all growth and withdrawals are tax-free.
• Non-Tax-Sheltered (NTS) assets: Interest and dividends are taxed annually; capital gains are taxed only upon sale.

Strategic withdrawal order:

• General rule: Withdraw NTS assets first (excluding TFSAs), then RRSP/RRIF/LIFs, and finally TFSAs. This allows tax-deferred accounts to grow longer and preserves tax-free income for later.
• Exceptions:
  • Capital gains: Selling NTS assets with large capital gains too early can trigger significant tax.
  • Tax credits: Ensure sufficient taxable income from RRSP/RRIF to utilize non-refundable tax credits (e.g., basic personal, age, pension income amounts).
  • OAS clawback: For high-income individuals, strategic withdrawals can help manage the OAS clawback.

Complexity requires planning. Balancing these factors to maximize after-tax income and avoid future income dips is complex. While PERC provides a blended approach, individuals with significant NTS assets should consult a tax accountant to tailor a withdrawal strategy that optimizes their unique situation.

10. Overcome Behavioral Biases and Seek Objective Guidance to Implement Your Strategy

The way a question or a problem is framed can dramatically affect how we respond to it.

The framing effect. Our preconceived notions and emotional responses often override rational financial decisions. For example, many retirees instinctively reject annuities due to perceived inflexibility or fear of "losing" money if they die early, yet they highly value Defined Benefit (DB) pension plans, which are essentially annuities.

Bridging the academic-practitioner gap. The decumulation strategies presented in this book are widely accepted by academics and professional bodies (like the Society of Actuaries and Canadian Institute of Actuaries) but are often not widely promoted by traditional financial advisors. This disconnect stems from:

• Outdated knowledge: Advisors may rely on older strategies less relevant in today's low-interest, longer-lifespan environment.
• Compensation models: Many advisors are paid a percentage of assets, creating a disincentive for strategies that reduce fees (Enhancement 1) or accelerate RRIF drawdown (Enhancement 2).

Practical implementation pathways:

• Robo-advisors: Offer low-cost, algorithm-driven investment management, ideal for Enhancement 1.
• DIY approach: Cheapest, but requires diligence and financial literacy.
• Employer-sponsored plans: If available, these often provide low-cost investment options and support, extending beyond retirement.
• Objective financial advisors: Seek out advisors who embrace these modern decumulation principles and whose compensation aligns with your best interests. Avoid those pushing high-fee products or deferred sales charges (DSCs).

Last updated: January 15, 2026