Pat, 63, and Maggie, 60, are nearing retirement with $800,000 in RRSPs and $200,000 in TFSA assets. They also expect to receive 90% of the maximum CPP pension and full OAS pensions. Their goal is to maximize their income while ensuring their savings last into their 90s.
They are considering three strategies:
1. Interest-only withdrawals: This approach involves drawing only the interest each year, leaving the principal untouched. While this guarantees their savings will never run out, it provides relatively low income.
2.
Algorithm-based retirement income strategies
The 4% rule: This strategy involves withdrawing 4% of their assets in the first year of retirement and adjusting for inflation in subsequent years.
However, given their low net investment return, this method may not be suitable for their specific financial situation. 3. Algorithm-based withdrawals: This approach uses an algorithm to calculate the optimal income based on specific economic assumptions, such as an investment return of 4.5% before fees, investment fees of 1.5% per year, and future inflation at 2.2% per year.
This method can be accessed through online retirement calculators or financial planners. After comparing the strategies, the algorithm-based approach emerges as the most effective for Pat and Maggie’s scenario. This demonstrates that leveraging scientific methods and seeking external expertise is more beneficial than relying on simple heuristics.
The analysis was conducted by Frederick Vettese, a former chief actuary of Morneau Shepell and the author of the article.
