Decumulation Planning
**For illustration purposes only**
With the twins off to post-secondary, and as the Smith’s approached retirement, they started to wonder how they would start to access their accumulated savings. In particular, they found it could be confusing to determine which of their investment accounts should be drawn down first, and had heard that it might make sense to take some lump-sum withdrawals from their RRSP just as they retired, to avoid potential taxes in the future when they both died and the RRSP’s become taxable.
To fully appreciate the various tax and cash flow implications of these choices we have built a model that allows us to compare and contrast different strategies.
By putting all the results into a “heat map” as pictured below, it is easy to see how the various strategies compare as time goes on. With this technique we can also look at potential estate implications so that the risks of taxation at life expectancy can also be considered.
In the graphic below, we compared a standard withdrawal strategy (Strategy #1) to a lump-sum withdrawal from an RRSP in year 1 (Strategy #2). Although there is a lot of information contained in the graphic below, the key was to examine the far right column marked “PV” to see if Strategy #2 makes sense. In this case, Strategy #2 is about even with Strategy #1 in Year 1 (colored yellow), but in many subsequent years, Strategy #2 is superior (marked green), however later in life Strategy #2 turns out to be inferior (dark orange coloring).
It turns out that many withdrawal strategies follow a similar pattern of being favourable in certain years, but unfavourable in other years. As in this case, a strategy might make sense in the early years, but later in life end up costing you money. Other strategies follow the opposite pattern.
With our model we were able to quickly compare various strategies, and the heat map allowed us to work with the Smith’s to see which strategy suited their circumstances, risk tolerances, and financial goals. In particular, the Smith’s decided to take a long-term approach, counting on a lengthy and healthy retirement, in which case it made more sense for them to leave their funds in the RRSP for now, and not take a lump-sum withdrawal.
More case studies.
Follow along with Alice and Adam Smith as they take advantage of the Clear Sky Private Wealth services.
