Which Accounts Should I Spend from First in Retirement?

For those of us retiring without employer pensions, it’s a challenge to find the best way to spend the savings in our various accounts, a process called decumulation.  Most of us have RRSPs/RRIFs (or other tax-deferred accounts) and TFSAs.  Some of us also have taxable (non-registered) accounts.  Even after we decide how much we can safely spend each year, it’s not obvious which accounts we should spend from first.  Here I describe how I spend from my accounts.  It may or may not work well for people whose financial circumstances differ from mine.

While working, our spending is usually closely linked to the income we declare on our taxes.  If we start with declared income and subtract taxes and savings, the rest is what we spent.  In retirement, it often doesn’t work this way.  If we spend from TFSAs or from taxable accounts, our spending can exceed the income we declare on our taxes.  This gives us some control over our reported income even when we’ve already decided how much we’re going to spend for the year.

As a general rule, deferring taxes is a good idea.  So, we might think that spending from taxable accounts and TFSAs first and RRSPs/RRIFs last would make sense.  But I didn’t find this to be true in my case.

My Decumulation Approach

To begin with, my simulations indicate that I should keep transferring assets from my taxable accounts to my TFSAs each year, and delay spending any TFSA money until the taxable accounts are gone.  Even then, it makes sense for me to reserve part or possibly all of my TFSAs in case I need to make large expenditures.  If I ever had to dip into an RRSP/RRIF to buy a car, help a family member, or pay for a medical emergency, the spike in the income I’d have to report on my taxes that year would be expensive due to Canada’s graduated rate tax system.

So, now it would seem that the correct spending order is taxable accounts, then RRSPs/RRIFs, and finally TFSAs.  However, if I do this starting today, I’d be declaring a low income consisting of just the interest, dividends, and capital gains from my taxable assets.  My simulations show that I’m better off spending from my RRSPs to top up my income to fully use the low tax rate brackets.  This is a trade-off between giving up some tax deferral to make a lightly-taxed RRSP withdrawal today versus a more heavily-taxed withdrawal in a future year.

So, each year early in December, I estimate my income and my wife’s income from all sources, and then take out enough from our RRSPs to take both of our incomes to the top of the second tax bracket.  I live in Ontario, and for 2021 this second bracket ends at an income of $49,020.  Others may find that staying within the first bracket or moving into the third bracket is better, depending on how much money they have saved.  The bulk of our spending today is from taxable assets, but with this topping up of tax brackets, some of it is from RRSPs.

As we get closer to our first forced RRIF withdrawals when we’re 72, it will become clearer whether the total income from CPP, OAS, and RRIF withdrawals (and possibly annuities if we buy any) will drive us into high tax brackets and possibly OAS clawbacks.  If it becomes clear that this won’t be a problem, then we’ll just continue as we have been from now until we’re 72.  If it looks like we’d be paying high taxes due to big RRIF withdrawals after we’re 72, we would start drawing larger amounts from our RRSPs/RRIFs in the years leading up to age 72.  This would have an income smoothing effect designed  to increase our total after-tax spending.

Depending on how large our TFSAs get, sometime after the taxable assets are gone we may start spending some of our TFSA assets each year to reduce the amount of RRIF income we need to draw.  Whether this makes sense will become clearer in our 70s.

This may seem like a lot to worry about, but fortunately, this is a very slow-moving problem.  We really only need to think about these issues once per year.  And likely, small course changes determined by portfolio returns and tax law changes will only be necessary every 5 or 10 years.

Feedback is welcome.  I don’t claim to have the perfect plan, and I certainly can’t say my approach will work well for others.  But I do think it will work well enough for me.