Decumulation: issues and strategies
Reaching retirement with a well-stocked investment portfolio is a great achievement. But you still need to know how to effectively withdraw it to maximize your income, minimize your tax bill, and ensure the longevity of your capital. Here's what you need to know.
Withdrawing your investments isn't a random process. Here are the main challenges to consider:
- Taxation: Each type of investment (RRSP, TFSA, RRIF, non-registered accounts) is taxed differently. A poor strategy could result in unnecessary taxes.
- Longevity: Your investments must support your standard of living for several decades.
- Inflation: Rising prices can erode your purchasing power over time.
- Market volatility: Withdrawing invested amounts during declining markets can harm the financial health of your portfolio.
2. Three keys to successful decumulation strategy
To maximize your retirement income and reduce your taxes, here are some proven strategies:
- Withdraw non-registered accounts first to take advantage of the favorable tax rate on capital gains and dividends.
- Gradually convert your RRSP to a RRIF to spread the tax over several years.
- Withdraw from your TFSA last, as withdrawals are not taxable and can continue to grow tax-free..
A good habit to get into: don't withdraw more than 4% of your capital each year. This reduces the risk of depleting your funds too quickly.
- Split income with your spouse if possible to reduce your overall tax rate.
- Keep an emergency reserve accessible to avoid selling at a loss when the markets are down. For example, a less volatile money market fund placed in a TFSA. Withdrawals are not taxed, making it a good temporary plan B with no tax impact.
Contact us for personalized advice for your situation.
To optimize retirement taxes, it is advantageous to start by withdrawing non-registered accounts, then gradually convert the RRSP to a RRIF, and keep the TFSA for the end, since TFSA withdrawals are tax-free.
Béatrice Roy, B.A.A., PI. Fin., RIS
Financial Planner and Mutual Fund Representative, Private Wealth
A simple theory to avoid excessive withdrawals? Don't withdraw more than 4% of your capital each year. This reduces the risk of depleting your funds too quickly.
Frédéric Robin, B.Comm., Fin. PI., RIS
Planificateur financier et représentant en épargne collective, Gestion privée
Take advantage of tax strategies. To reduce your tax bill and better manage market volatility, consider income splitting with your spouse and use a TFSA to cover your needs rather than selling assets at a loss.
Norman Szeto, MBA, Fin. PI., RIS
Planificateur financier et représentant en épargne collective, Gestion privée
Financial needs change with age. It's therefore essential to review your withdrawal strategy periodically with a financial advisor to:
- Adjust your withdrawals based on market fluctuations.
- Optimize your tax situation based on regulatory changes.
- Ensure your investments are aligned with your life expectancy.
- Get a personalized financial plan (or a retirement plan)
- Review your current situation
- Access tools to track your progress
- Plan your withdrawals wisely
- Prepare for or manage an estate with peace of mind
Get in touch with us:
T 514 788-6485 | Toll-free 1 800 291-0337
Monday to Thursday, 8 am to 8 pm | Friday, 8 am to 5 pm
4. Types of investments suitable for decumulation
The list below is not exhaustive, but it focuses on products generally considered less risky. Indeed, when it comes to withdrawing funds, with an increasingly short investment horizon, the tendency is often to move towards safer options.
The choice of investments is crucial to ensure a stable income while managing risks. It is important to choose products that are suited to your investor profile and specific needs. Each product has advantages and disadvantages depending on your risk tolerance and financial objectives. It is strongly recommended to consult a professional to develop an optimal withdrawal strategy tailored to your situation.
Here are some options to consider.
Designed to generate regular distributions, they offer a balance between performance and stability.
Offer diversification between stocks and bonds to limit volatility.
Generate passive income while benefiting from growth potential.
Gradually adjust their asset allocation to reduce risk as you age.
Provide a fixed and secure income, useful for covering essential expenses.
They offer a guaranteed lifetime income, reducing longevity risk. They are particularly useful for those who want to secure a portion of their income.
Withdrawing investments is a complex exercise that requires careful planning. A good strategy will allow you to fully enjoy your retirement and reduce financial stress. Don't hesitate to consult our team to help you develop an optimal and personalized plan!
Get in touch with us:
T 514 788-6485 | Toll-free 1 800 291-0337
Monday to Thursday, 8 am to 8 pm | Friday, 8 am to 5 pm