The choices you make about how to withdraw income from your retirement assets have a big impact on the size and distribution of your pension.

Retirees have opportunities to influence both the amount that can be sustainably withdrawn from their investments and the timing of those withdrawals. In a recent white paper, we discuss the impact of three opportunities:

  • Delaying CPP
  • Relaxing the need for inflation indexed withdrawals
  • Allowing some variability of withdrawals.

We consider each opportunity separately and how they interact with the fictional example of Alice and Bob. Alice and Bob retire at 65 with $2 million in RRSPs, and CPP/OAS pensions.

Delaying CPP may seem a curious strategy if the intent is to maximize income. Certainly, fewer than 1% of Canadians pursue this option and for those with modest or no savings it may not be practical. For retirees with sufficient investment assets and average health the higher payments from delaying outweigh the loss of income. Alice and Bob boosted their after-tax retirement income by 4.5% by delaying CPP until age 70.

Retirees are rightly concerned that their purchasing power is maintained throughout retirement.  The evidence from developed countries, including Canada, is that retirees’ actual spending declines with age, by approximately the current rate of inflation. Relaxing the requirement that portfolio withdrawals keep pace with inflation boosts spending early on (when retirees may be more active) at the expense of spending in later years. For Alice and Bob, the initial spending increased by 26 % but the real spending power at age 95 declines by 24%. The impact on total spending throughout the retirement period is negligible. For retirees who are concerned about reduced spending in later life, deferring CPP may be an attractive option.

Variable spending makes intuitive sense: when markets underperform some adjustment to budgets is prudent. The challenge is deciding an appropriate response that is not an over reaction to short-term market performance. The ARVA scheme we describe provides a mechanism for providing retirees with robust spending guidance as they age and portfolios values fluctuate. In doing so, a large surplus or the risk of running out of money prematurely is avoided. For Alice and Bob, allowing year to year variations of 5% using ARVA means an additional 25% withdrawal over the retirement period. The additional withdrawal from the portfolio is small initially but grows over time. This makes it a useful complement to removing or reducing inflation indexing. For Alice and Bob, the combined impact was to boost withdrawals throughout the 30-year retirement period by an amount equivalent to additional 1.25% investment return.

Retirement is an opportunity to choose how to spend your time and your savings. We have illustrated three options that can materially impact the total spending in retirement and the distribution of that spending.