A couple in their early 60s came to us recently with a $2 million portfolio and one big question:
How much can we actually spend each year in retirement without running out of money?
It’s a question we hear all the time. Many people assume that with a $2 million portfolio, they can simply draw a fixed amount each year and never worry. In reality, retirement spending isn’t that simple.
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Why the 4% Rule Falls Short
The 4% rule suggests you can withdraw 4% of your portfolio in your first year of retirement, adjust that amount annually for inflation, and not run out of money.
While it’s a useful starting point, it ignores critical factors:
- Account type: There’s a huge difference between $2 million in a TFSA and $2 million in an RRSP.
- Taxes: Withdrawal timing can drastically change your lifetime tax bill.
- Spending patterns: Most people spend more in their 60s and less in their 80s.
- Government benefits: CPP and OAS timing can make a big impact.
Meet Paul and Sandra
- Ages: 63 and both retired
- Portfolio:
- $600,000 each in RRSPs
- $125,000 each in TFSAs
- $550,000 joint non-registered account
- Total: $2 million
- CPP & OAS: Both deferred to age 65
- Paul: $1,372/month CPP + $750/month OAS
- Sandra: $1,100/month CPP + $750/month OAS
- Expenses: $96,000/year ($8,000/month) increasing with 3% inflation
- Home: Fully owned, not included in the plan
At first glance, their plan looked solid: 138% funded with an after-tax estate of $1.4 million. The way their withdrawals were structured left significant RRSP balances until the end, creating a large final tax bill.
Why Asset Location Matters
We compared two scenarios:
- Original portfolio: $1.2 million in RRSPs.
- Shifted portfolio: $700,000 in RRSPs, $250,000 in TFSAs, more in non-registered accounts.
The second scenario left a $463,000 larger estate with the same $2 million total, simply because the RRSP balance was smaller. This shows why account type, not just portfolio size matters for retirement income.
Withdrawal Strategies Tested
1. Draw TFSA First (Base Plan)
- TFSAs depleted before non-registered, RRSPs left for last.
- Large RRSP balance remaining at death, heavily taxed.
- Estate: $1.43M after tax.
2. Pro-Rated Withdrawals
- Take proportionally from RRSP, TFSA, and non-registered each year.
- Reduced RRSP balance at death.
- Estate: $1.76M after tax.
3. RRSP Meltdown Strategy
- Draw heavily from RRSPs before CPP and OAS begin at 70.
- Keeps withdrawals in a low tax bracket for years.
- Estate: $2.0M after tax, with significantly lower lifetime taxes.
Matching Spending to Lifestyle
Paul and Sandra didn’t have children and wanted to spend more early in retirement. We adjusted their plan:
- Ages 63–70: $10,000/month
- Ages 70–80: $9,000/month
- Ages 80+: $8,000/month
Even with these higher early expenses, the plan was still 120% funded with a $1.4M estate. This allowed for more enjoyment in the early years without jeopardizing long-term security.
Stress Testing the Plan
We tested a tougher scenario:
- Lower returns: 4.75% instead of 5.25%
- Higher inflation: 3.5% instead of 3%
- Longer lifespan: 93 instead of 90
Even then, they finished with $140,000 at age 93, proof that the plan could handle market and longevity risks.
Key Takeaways
1. Account type matters: $2M in RRSPs is very different from $2M in TFSAs and non-registered accounts.
2. Withdrawal order impacts taxes: A poor strategy can cost hundreds of thousands in unnecessary tax.
3. Front-loading spending can let you enjoy more in your active years while still maintaining security.
4. Always stress test: A good plan leaves room for lower returns, higher inflation, and longer lifespans.
Final Thoughts
No two retirements look the same. Your withdrawal strategy should be tailored to your account mix, your spending goals, and your tax situation.
At Trans Canada Wealth Management, we specialize in creating tax-efficient retirement income plans so you can spend confidently and keep more of what you’ve earned.
If you’d like to see how much you can safely spend in retirement, we offer a free of charge retirement call. In it, we’ll show you your safe spending level while reducing your lifetime tax bill. Come visit our website and book a call with us.
