Have you heard this one? Withdraw retirement income first from non-registered accounts so that funds in registered accounts (such as RRSPs) can continue to compound tax free. It’s widely accepted wisdom, but it’s not always right. In his second book, Your Retirement Income Blueprint (John Wiley & Sons, 2011), author and financial advisor Daryl Diamond challenges this and other misconceptions about retirement income planning.
Considered a pioneer in the field, and with over 20 years of experience, Diamond’s iconoclasm is well founded. On withdrawing income from non-registered accounts he points out that “prolonged deferral of RRSP money can lead you into a tax trap.”
This is because RRSPs have to be rolled over at age 71 into registered retirement income funds (RRIFs) or annuities. Most seniors choose the RRIF option, which has minimum withdrawal requirements that climb from 7.4% of assets at age 72 to 20% by age 93. Such high rates can claw back benefits like Old Age Security. They can also push retirees into higher tax brackets—especially when a spouse dies and their income transfers to the surviving spouse, or the surviving spouse dies and all of the estate becomes taxable in the year of death. Instead Diamond argues for a balanced approach and offers guidelines on how to draw down from both registered and non-registered sources, using criteria such as the “Topping up to Bracket” rule.
Another rule of thumb Diamond takes on is that retirees “need retirement income that is fully adjusted for inflation for 35 years.” But in his experience with retirees, he’s noticed a tendency for consumption levels to drop off after age 75; this reduced need for withdrawals helps cancel out the increase needed to keep up with inflation.
Diamond feels the sustainable rate of withdrawals is 5% or slightly higher. This is above the 4.2% maximum (plus annual inflation adjustment) recommended in William Bengen’s seminal 1994 study.
What about the “old school” thinking that says retirees should get more conservative with their investments as they get older? Should the asset allocation increasingly shift toward fixed-income investments as a retiree ages? Diamond doesn’t tilt at this one but adds the caveat that “some element of growth,” particularly stocks, is needed to protect against inflation.
Some of his other interesting perspectives include when to start CPP (early is usually best), the “Cash Wedge” model for withdrawals, and enhancing the sustainability of withdrawals by using low volatility securities (such as dividend stocks) in the equity portion of the portfolio. On top of this, Diamond has a knack for turning a phrase and making relatively dry topics sound interesting. So Your Retirement Income Blueprint makes for both an entertaining read and worthy addition to your reference library.