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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert

By Robyn K. Thompson  | Friday, December 07, 2018

Q – I’m 65, and I’ve accumulated a nest egg in the vicinity of $1 million, consisting of pension plans, a fairly large-size RRSP, TFSA contributions, some inheritances, and some money left over from downsizing my home to a condo. I’ve read that $1 million is what you need to retire on comfortably, but with possibly another 20 years or more ahead of me, I don’t see how it will last. Do you have any suggestions, particularly about the RRSP? – Rachel N., Thornhill, Ontario

A – Here’s what you need to know to make your million-dollar nest egg last.

Your employer pension plans are pretty much set. You’ll start receiving a fixed monthly amount when you trigger your pension. For TFSAs, there are no set withdrawal timetables – you can withdraw funds tax-free at any time in a lump sum or in some form of systematic withdrawal.

But RRSPs are a bit different, and the rules are very clear. By the end of the year in which you turn 71, you will need to collapse your RRSP. And you have three choices for what to do with the funds. You can take the entire amount into income (not very tax-effective if the RRSP is one of those big million-dollar ones), purchase an annuity, or convert your RRSP into a Registered Retirement Income Fund (RRIF). Or, you can arrange for some combination of these choices.

1. The RRIF alternative. A RRIF is much like an RRSP in that investments in the plan continue to grow sheltered from tax. The twist is that you must withdraw a minimum amount from the RRIF every year. That income then becomes taxable at your top marginal rate in the year of withdrawal. The annual minimum withdrawal is calculated by multiplying the market value of your RRSP account on December 31 of the previous year by a percentage pre-set by the government.

The RRIF rules state that in the year after you open your RRIF, you must withdraw 7.38% of the value of the RRIF. This increases over time so that by age 81, the minimum annual withdrawal is 8.99% of assets. By age 91, the minimum annual withdrawal becomes 14.73%, climbing to 20% by age 94.

2. The annuity option. Another common RRSP maturity option is the purchase of an annuity contract to provide a guaranteed income stream. An annuity is an insurance-based income product. Putting it very simply, when you purchase an annuity, you essentially buy a contract under which the issuing company (usually an insurance company) invests the lump sum you provide and guarantees a regular payout over the life of the annuity contract.

There are several types of annuities. For example, a “Term Certain Annuity” guarantees a set monthly income for as long as you want, up to age 90. If you die before all payments are received, the balance will go to your estate. Another option is a “Life Annuity,” which guarantees a set monthly income for as long as you live. However, payments stop when you die, and no money will go to your estate.

Annuities are complex products, and it is important that you understand how interest rates and other factors affect how much income you will receive. It may not be advisable to invest all of your investments into an annuity – this will depend on your investment objectives and risk tolerance. I recommend seeking the advice of your financial planner and/or a licensed insurance agent to discuss annuity options and how they might best fit into your overall retirement plan.

3. “Pensioning” retirement income. I am a firm believer in “pensioning” your retirement income. To do this, you can invest a portion of your portfolio in an insurance product that offers a guaranteed income withdrawal feature.

This type of product is similar to an annuity in that it guarantees a specific regular monthly, quarterly, or annual payment until you pass away. But unlike an annuity, you can cash in the policy and take the “cash surrender value” if your situation changes dramatically and you need the cash. (But I do not recommend taking the cash out of this type of policy except as a last resort.)

Ensure minimum income

My advice is always to make sure your retirement “nut” is covered first. Ensure you have the minimum income you need to live on. An insurance product with a guaranteed income withdrawal is one option, but these can be complicated, so I’d recommend talking to a qualified insurance specialist first. Then diversify the balance of your holdings into a portfolio that will generate some capital appreciation and growth into the future.

To determine whether your funds will last, let’s also use the so-called “4%” rule. This rule is used to determine how much a retiree should withdraw from retirement accounts each year to provide a steady income stream while also maintaining an account balance that keeps income flowing through retirement. A 4% withdrawal rate is generally considered safe, as the withdrawals will consist primarily of interest and dividends.

So in the case of a retiree starting with a $1 million aggregate fund, the 4% rule means the retiree would withdraw $40,000 per year, or $3,333 per month.

Now let’s assume the $1 million remains invested in various securities, including stocks, bonds, ETFs, and mutual funds, generating an average annual compounded rate of return of 5% – a very conservative and achievable rate of return.

At the 4% withdrawal rate and the 5% rate of return, the $1 million dollars will actually last for 30 years, or to age 95, before it’s depleted.

Keep in mind, too, that the retiree will be receiving Canada Pension Plan income, and possibly Old Age Security (some of which is likely to be clawed back). But that can add as much as $13,610 per year from CPP and $7,039 per year from OAS, both of which are indexed to inflation. With the $40,000 annual withdrawal from the retirement funds and income from CPP and OAS, the retiree could have an annual income of $60,649, before tax, in 2018. Higher investment returns and indexed increases in CPP and OAS could increase that amount in future years.

That’s why $1 million is considered the “magic” number to retire on.

Watch Robyn discussing the $1 million retirement on CTV’s “Your Morning.”

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at for a confidential planning consultation.

Notes and Disclaimer

© 2018 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

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