How to Draw Down $1 MILLION in RRSPs

How to draw down $1 million in RRSPs

Some say $1 million dollars ain’t what it used to be. Well, we’re here to share today that’s still A LOT of money to spend and enjoy in retirement if you have it.

We love sharing case studies on this site – so read on for this valuable one – how to draw down $1 million in RRSPs for your retirement.

Can you retire with $1 million in RRSPs?

Of course you can. 

Before we jump into today’s case study, some context and inspiration.

It all depends on what you intend to spend and when.

• Not everyone wants to retire early. So, retirement at a more traditional age is just fine!
• Not everyone has huge spending needs in retirement. So, based on what you own and the timing of that spending from what you own, you may or may not need $1 million invested.
• Not everyone is lucky enough to have a workplace pension. But, many Canadians will get some meaningful pension-like income from Canada Pension Plan (CPP) and Old Age Security (OAS) to supplement their retirement income needs. This should be not be overlooked!

Let’s get into our case study with this in mind. :)

How to draw down $1 million in RRSPs

Our case study participants today are Shawn and Sarah. This is just one drawdown approach for them to consider.

Shawn just turned 61, Sarah is 60 now.

They live in Halifax, NS and own their home worth $750,000.

While Shawn and Sarah have enjoyed their workplace careers, they want to retire. They want to spend more time travelling and when not travelling they will volunteer more in their community.

They want to know if they have enough to retire and meet their spending needs with about $1 million combined invested inside their RRSPs.

Let’s find out. 

• Their combined salaries are about $140,000 per year but we’ll use a value much lower than that for their retirement spending – since they no longer need to save for retirement AND the house is paid off. My Own Advisor wrote about some popular retirement rules of thumb in his post here.
• Shawn and Sarah are not “government workers with juicy pensions” – so they cannot rely on any workplace pensions to support them.
• Given established working careers coupled with their desire to retire soon, we’re going to assume about 80% of max Canada Pension Plan (CPP) benefits at age 65 for each of them in this scenario. You can read our pillar post about when to collect CPP here – generally speaking “if you don’t need the money” then defer.
• Shawn and Sarah will also take Old Age Security (OAS) benefits at age 65, 100% OAS benefits, to take some pressure off RRSP/RRIF withdrawals. On that latter note, once you have reached age 65, the income you are withdrawing from your RRIF is eligible to be split unlike withdrawals from an RRSP, or RRIF income prior to age 65, that is not eligible to be split.
• Shawn and Sarah have two kids, both just left the house (!) so they are totally independent and on their own in their mid-20s.
• Shawn and Sarah have no need to sell their Halifax home. They are debt-free even though you can take a mortgage into retirement – but that’s a risk we don’t suggest that.
• They don’t intend to work in retirement at all. I don’t blame them. We might not either! :)
• Finally, we will assume our couple is going to get a small inheritance each, worth about $100,000 around the age 70 respectively.

Shawn and Sarah assets and projection assumptions:

• As of today, they have $1 million in combined RRSP assets to retire on. They figure that’s a great base and so they enlisted our help to determine what they could spend, what is their MAX spend and what could be any financial risks with their retirement income plan be. We will assume their mix of low-cost ETFs inside this account earn about 6% annualized – since they are about 90% equities and 10% cash inside this account.
• Shawn and Sarah have about $300,000 in combined TFSA assets: 100% in low-cost ETF XAW for long-term growth. Their adjusted cost base is about $200,000. We will assume XAW returns about 6% annualized for the coming decades.
• They have about $200,000 in a joint non-registered account full of Canadian equity – invested in low-cost ETF XIU for a mix of income and growth. Their adjusted cost base is about $150,000. We will also XIU returns about 6% over time.
• They keep $75,000 or so mixed between a higher interest savings account that earns 2-3% interest these days along with $10,000 sitting in their chequing account to manage daily expenses – bank account assets I will not include in this case study since that money is not part of their drawdown plan. It’s more like near-term travel spending and a good-sized emergeny fund.
• Like other case studies on our site, Shawn and Sarah recognize the value of keeping it simple.
  • They own XIU in their joint taxable account for Canadian stock market growth.
  • They own XAW for ex-Canada investing in their TFSAs.
  • And, they remain focused with this two-fund approach inside their RRSPs: a mix of XIU and XAW are the main equity holdings along with money market funds.
• Our couple has assumed 6% growth over the coming decades from all of their accounts with 3% spending inflation. While nobody can predict the investing future, we believe this is very reasonable given this aligns with FP Standards who forecast 10-year annualized returns:

Source: https://www.fpcanada.ca/projection-assumption-guidelines

(You can download your own free copy of these assumptions from that site.)

• To be a bit extra cautious, we’ll assume the market goes flat for the rest of the year with 0% returns pre-retirement.
• Finally, our case study couple assumes they might live to age 95 but they are smart – they know the process of planning is key – so they will revisit any assumptions annually with us to take advantage of their deep discount to recalibrate any projections as things change.

How to draw down $1 million in RRSPs

The results indicate Shawn and Sarah are in a GREAT financial position at age 61/60.

Their combined portfolio, without any pensions, without any government benefits factored-in is worth $1.5 million with most of that inside their RRSP.

We believe drawing down the RRSP account, first, in the coming years, is smart for Shawn and Sarah although a blended approach could be considered. Taking down the RRSP is smart early for two key reasons:

1. To get the cashflow moving out of the RRSPs; use tax-deferred money for spending needs, and
2. To smooth out taxation over time before CPP and OAS income streams come online at age 65 and before RRSPs are forced into an annuity or RRIF in the year you turn age 71.

The result of this approach has them moving from a 25% or so average tax rate in their 60s to an average tax rate under 5% in their 80s (not a typo) since RRSP/RRIF assets are used up first, then tax-efficient non-registered assets are used up next, then finally TFSA assets are maintained “until the end”.

Our results also show that Shawn and Sarah are successful in their retirement income plan with a rate of return closer to 5% annualized vs. 6% annualized, which is a some nice buffer in case global ETF XAW or Canadian-focused ETF XIU underperforms for the coming decade or more. That could happen.

Here is what their cashflow chart looks like – extremely healthy and spending can go up as needed from today to age 80 with 3% higher spending inflation with ease. These are their go-go spending years. Slower-go spending years are factored-in beyond age 80.

Images courtesy of Cashflows & Portfolios low-cost service work.

Here is the cashflow withdrawals starting with their RRSP/RRIF assets first – getting rid of that deferred tax liability.

This means in their early 70s, while the RRSPs/RRIFs are almost gone, they will still have:

• A tax-efficient non-registered portfolio worth over $600,000 to live from, and
• Tax-free savings accounts valued at over $500,000 to live from, in addition to,
• CPP x2 + OAS x2 income streams to enjoy.

RRSPs/RRIFs gone? Yes. But they still have over $1 million invested in the bank that is more tax-efficient as they age. 

Well done.

Of course, this is just one scenario and one key drawdown approach. Your mileage may vary.

But the important part of this post should help you realize that spending RRSP/RRIF assets in retirement is not only a wise decision for many but likely an enjoyable one – as RRSPs/RRIFs come down in value other assets continue to move up assuming 5-6% annualized rates of return when left alone for compounding to do it’s work.

Shawn and Sarah will also have a house asset to consider tapping into, eventually, as they wish, worth over $2-million in their 90s.

In this plan, with these starting values, modest rates of return and inflation factors included, they will not run out of money whatsoever.

Need any support with some low-cost retirement income projections? We can help!

As passionate DIY investors, we offer up our time and expertise to help other DIY investors with RRSPs/RRIFs, Taxable Accounts, TFSAs and more!!

We’ve been more than happy to support close to 200 clients at the time of this post in just a few short years.

We know we can help you out too at a low-cost compared to the services and thousands of dollars charged by others!

If you are interested in obtaining private projections for your personal financial scenario, read more about our retirement projections services.

A reminder to those who have recently joined our readership and new fans of the site – our site continues to grow thanks to you!!

Thanks to all readers and members of this site. It’s a pleasure to engage with you.

Joe and Mark

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