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How Wealthy Canadians Actually Turn $5M Into a $200K/year Retirement Income — Transcript

by The Wealth Advisor · 3,443 words · 544 segments · language en · Watch on YouTube

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0:00If you have $5 million saved for
0:02retirement in Canada and you want to
0:03spend $200,000 a year, you might assume
0:06the hard part is already done. On paper,
0:09it looks simple. $200,000 a year on a $5
0:12million portfolio is a 4% withdrawal
0:14rate. That is textbook sustainable. But
0:17what most people do not realize until
0:18they actually sit down and build the
0:20plan is that $200,000 a year of
0:23retirement income in Canada does not
0:24give you $200,000 to spend. Depending on
0:28which accounts that money comes from,
0:30your actual after-tax spending could be
0:32anywhere from $155 to $185,000.
0:36That is the same portfolio and the same
0:38withdrawal amount with about a $30,000
0:40year difference in what actually reaches
0:43your bank account. The difference comes
0:45down to coordination, meaning which
0:47accounts fund which spending in which
0:50years. And getting it wrong is a single
0:52most expensive mistake I see wealthy
0:54Canadians make when they start drawing
0:56retirement income. In my practice, I
0:58build retirement income plans for
1:00Canadian families with $500,000 to $50
1:02million of investable assets. And this
1:04is a conversation I have with clients
1:06every week. So today, I'm going to walk
1:08you through exactly how a Canadian
1:10couple with $5 million builds $200,000 a
1:13year of retirement income so they keep
1:15as much as possible and pay the CRA no
1:18more than they have to. I will show you
1:20the three spending levels, which
1:21accounts fund each one, when the
1:23portfolio stops shrinking and starts
1:25growing again, and what happens when we
1:27run the plan through a bad market and
1:29lower government benefits. Before we get
1:31into the construction, if you are
1:33watching this and wondering what the
1:34difference looks like for your specific
1:36accounts and your specific tax
1:38situation, my team and I build exactly
1:41these income plans for our clients.
1:43There's a link in the description if you
1:44want to have that conversation. Let me
1:46show you exactly how this works through
1:47a couple that looks a lot like the
1:49families I work with. Andrew is 58 and
1:51Michelle is 56. Andrew spent 25 years as
1:55a senior VP at energy company in
1:57Calgary. Michelle ran a management
1:59consulting practice for 15 years before
2:01winding it down 2 years ago. Together,
2:04they have $5 million investable assets.
2:06Let me walk you through where that money
2:08sits. Andrew's RSP is $1.1 million from
2:11decades of maximum contributions at a
2:13high marginal tax rate. Michelle's RSP
2:16is $500,000.
2:18Their combined TFSAs are $350,000.
2:21They have maximized contributions
2:23consistently since the TFSA was
2:24introduced and invested in equities
2:26throughout, which has grown the combined
2:28balance meaningfully and far beyond what
2:30they have contributed. They have a joint
2:32non-registered investment account of
2:33$2.2 million, built from Andrew's equity
2:36compensation that vested over 20 years,
2:38plus Michelle's savings from her
2:40consulting years. And Michelle's holding
2:42company still has $850,000 in retained
2:44earnings from the practice. Their home
2:46is worth $1.4 million and is completely
2:49paid off. They have no other real estate
2:51and no debt. Andrew wants to retire at
2:5460. Michelle is already semi-retired,
2:56and they want to spend $200,000 a year
2:58in after-tax spending. Now, the first
3:00thing most people would do is divide
3:02$200,000 by the portfolio balance and
3:04conclude that a $400,000 withdrawal rate
3:06is fine. And on paper, well, it is fine.
3:10$5 million at 4% is $200,000 a year.
3:13But, that calculation treats every
3:15dollar in the portfolio as equal. And in
3:18Canada, every dollar is not equal. A
3:21dollar inside Andrew's RSP is a pre-tax
3:23dollar. When he withdraws it, the full
3:26amount gets added to his income and
3:27taxed at his marginal rate. At $200,000
3:30of total income in Alberta, that
3:31marginal rate is around 42% on the upper
3:34portion. A dollar inside their TFSA is
3:36an after-tax dollar. When they withdraw
3:38it, they keep everything. There is no
3:40tax. Nothing else gets added to their
3:42income, and there's no impact on
3:44government benefits. How a dollar inside
3:46the non-registered account gets taxed
3:47depends on what type of income it
3:49generates, whether it's capital gains,
3:51Canadian dividend, or interest. And each
3:53is taxed at a bit of a different rate.
3:54And a dollar inside Michelle's holding
3:56company has been taxed at the corporate
3:58rate, but will be taxed again when it is
4:00distributed to her personally. So, the
4:02same $5 million can give them very
4:04different spending power depending on
4:06where the money comes from. We already
4:08know their portfolio can produce
4:09$200,000 a year. What we need to work
4:12out is how they build that $200,000 so
4:14they keep as much of it as possible. And
4:17that starts with something most
4:18retirement plans skip entirely, which is
4:20separating spending into layers. Most
4:23retirement plans are built around one
4:25number. You tell your advisor you want
4:27to spend $200,000 a year. They plug that
4:29into the projections as a flat annual
4:31withdrawal rate adjusted for inflation.
4:33Every year costs the same for 30 years.
4:36This is how most plans are modeled, and
4:38it is almost never how retirement
4:40actually works. Because not all of that
4:43$200,000 has the same job. Some of it is
4:46non-negotiable, the costs that show up
4:48every month whether you want them to or
4:50not. Some of it pays for the lifestyle
4:51you want to live in a normal year. And
4:53some of it is the extraordinary spending
4:55you want to do while you are healthy and
4:57active enough to do it. So, instead of
4:59one flat number, we build Andrew and
5:01Michelle's spending in three layers. The
5:03first layer is lean spending. Lean is
5:06the amount Andrew and Michelle could
5:07spend if they needed to scale back and
5:09still genuinely enjoy their retirement.
5:11It includes the fixed costs that do not
5:13go away, like property taxes, insurance,
5:16utilities, groceries, vehicle costs,
5:19health coverage, and basic maintenance
5:21on the house. But, it also includes
5:23modest dining out, some local travel,
5:26small gifts, and enough margin to live
5:28with dignity. For Andrew and Michelle,
5:30lean spending is about $75,000 a year.
5:33Next comes maintain spending.
5:35This is the lifestyle they actually want
5:37to live in a normal year. It's their
5:39current lifestyle carried into
5:40retirement plus the extras that come
5:42along with having free time. More
5:44travel, more dining out, a gym
5:46membership upgrade, regular visits with
5:47the grandkids, and some hobby spending.
5:50For Andrew and Michelle, maintain adds
5:52another $55,000 on top of lean, bringing
5:54the total to $130,000 a year. The top
5:57layer is luxury spending. This is the
6:00extraordinary spending they want to do
6:01during the first decade of retirement
6:03while they are healthy, energetic, and
6:05motivated to check things off that list.
6:07Premium international travel, taking the
6:09entire family on a trip they will
6:10remember forever, the home renovation
6:13they have been putting off, and business
6:15class flights instead of economy. For
6:17Andrew and Michelle, luxury adds another
6:1870,000, bringing the total to $200,000 a
6:21year during the go-go years. Separating
6:24spending this way matters for everything
6:26that follows. Lean spending needs to be
6:29funded by the most reliable, most
6:30protected income sources, meaning money
6:33that arrives whether markets cooperate
6:34or not. Maintain spending should be
6:37funded by a mix that balances tax
6:39efficiency with reliability. And luxury
6:41spending should be funded by the most
6:43flexible sources, meaning money that can
6:45be turned on or off depending on how
6:47markets and the plan are doing in any
6:49given year. When you fund all three
6:51layers from the same account in the same
6:53way every year, you lose this
6:55flexibility entirely. When you match
6:58each layer to the account that suits it
6:59best, you keep a lot more of the
7:01$200,000, and you build in the ability
7:04to adjust without dismantling your
7:06lifestyle. And that matching is where
7:08most of the Canadian tax planning
7:10happens. But before we get into which
7:12accounts fund which levels, I need to
7:14show you something that changes how most
7:16people think about $200,000 of
7:17retirement income in Canada. Let me show
7:20you two ways of taking the same
7:22$200,000. In the first approach, Andrew
7:25and Michelle pull the $200,000 from
7:27their RRSPs. Every dollar is fully
7:29taxable as income. At $200,000 of
7:32combined taxable income split between
7:34them, the blended effective rate in
7:36Alberta is roughly 25% to 27%. Once you
7:39account for the federal and provincial
7:40tax on approximately $100,000 per
7:43person, that means $50,000 to $54,000
7:46goes to the CRA. Their after-tax
7:48spending from $200,000 of RRSP
7:50withdrawals is approximately $146,000 to
7:52$150,000.
7:54They withdrew 200, but they only spent
7:56about 140,000 of it. In the second
7:58approach, Andrew and Michelle
8:00coordinate. They withdraw $60,000 from
8:02their RRSPs, split between them so it
8:04fills the lower tax brackets. They take
8:07$40,000 from their TFSAs, which is
8:09completely tax-free. They draw $70,000
8:12from the non-registered account,
8:13structured as a mix of Canadian dividend
8:15income and realized capital gains that
8:16receive preferential tax treatment. And
8:19they take $30,000 from Michelle's
8:20holding company as a dividend. The total
8:22gross withdrawal is still the same
8:25$200,000 we spoke about. But the tax
8:27bill this way is roughly 12,000 to
8:2918,000 dollars because each amount was
8:32pulled from the account where the tax
8:33treatment is most favorable. Their
8:36after-tax spending from the coordinated
8:38approach is approximately 184,000 to
8:41188,000.
8:43They withdrew the same $200,000 and
8:45ended up with roughly 34 to 40,000
8:47dollars more to spend in that year. Over
8:5010 years, that coordination could be
8:52worth 340 to 400,000 dollars in
8:54additional spending power. And that
8:56comes from pulling the money from the
8:57right account in the right amount at the
9:00right time without needing a better
9:02investment return or more savings. That
9:0534,000 to 40,000 dollars a year either
9:07goes into Andrew and Michelle's life or
9:09it goes to the CRA. So, to actually
9:12spend the full $200,000, they would need
9:14to withdraw a little over 215,000
9:16using a more coordinated approach. In
9:18Canadian retirement income, deciding
9:20which accounts fund which spending in
9:22which years matters just as much as the
9:24withdrawal rate and the portfolio
9:26return. By the way, if you're watching
9:27this and wondering what the difference
9:29between gross and net looks like in your
9:31own plan, that's one of the first things
9:32my team and I calculate when we build a
9:34retirement income strategy.
9:36There's a link in the description if you
9:37want to have that conversation because
9:39the difference between what you withdraw
9:41and what you actually get to spend adds
9:43up every single year of a 30-year
9:45retirement.
9:46And now let me show you exactly how
9:48Andrew and Michelle match each spending
9:50level to the right accounts. The lean
9:52floor is $75,000 a year. This is the
9:55spending that needs to arrive reliably
9:57every month regardless of what markets
9:59do. For Andrew and Michelle, the first
10:01question is what reliable income sources
10:02will eventually cover this floor. CPP
10:05for both of them, if they delay to 65 or
10:07later, will provide roughly 25,000 to
10:1030,000 dollars a year combined. OAS for
10:12both of them will provide roughly
10:14$18,000 per year combined. In years
10:16where we need to withdraw more from
10:17taxable accounts, we monitor their
10:19individual income carefully to avoid
10:21triggering the OAS clawback, which
10:23starts at approximately 90 to $95,000 of
10:25net income per person. At their income
10:28level, it does not take much of stacking
10:30of RSP withdrawals and hold co
10:31distributions to approach that
10:33threshold. So, the government benefits
10:35can cover roughly 40,000 to 48,000 of
10:38the $75,000 lean floor once they are
10:40fully online.
10:42The remaining 27,000 to 35,000 of lean
10:45spending comes from a controlled RSP
10:47drawdown, pulling just enough to fill
10:49the lower tax brackets without pushing
10:51into the higher ones. So, the lean floor
10:53should be funded by the most
10:54predictable, most tax-efficient
10:56combination of government benefits, and
10:58carefully measured RSP withdrawals. That
11:01keeps the market risk away from the
11:02essentials and avoids paying more tax
11:04than necessary on the basics. The
11:06maintain level adds 55,000, bringing
11:09total spending to $130,000 a year. This
11:12layer is funded by a combination of
11:13additional RSP withdrawals and TFSA
11:15withdrawals. The RSP withdrawals are set
11:18each year based on Andrew and Michelle's
11:20total taxable income. In a year where
11:22either of their income is already near
11:25or the top of a tax bracket, they stop
11:27pulling from the RSP and supplement from
11:28the TFSA instead. The TFSA adds income
11:32without adding taxable income, so it
11:34does not push them into a higher tax
11:36bracket. It does not trigger OAS
11:37clawbacks, and it adds no tax at all.
11:40This is where the TFSA earns its
11:42reputation as the most valuable account
11:43in Canadian retirement. And as we draw
11:46down the RSP in those early years, the
11:48after-tax proceeds that Andrew and
11:50Michelle do not need for spending can be
11:52redirected into their TFSA's. That
11:54converts taxable future income into
11:56tax-free future income, and gradually
11:59shift the account structure in their
12:01favor. The luxury level adds another
12:03$70,000, bringing total spending to
12:05$200,000 during the busy years of
12:07retirement. This layer is primarily
12:09funded by the non-registered account,
12:10and where appropriate, distributions
12:12from Michelle's holding company.
12:14Canadian dividends earned in the
12:15non-registered account receive
12:16preferential tax treatment through the
12:18dividend tax credit. And, of course,
12:19capital gains are only 50% taxable. So,
12:22realizing gains in a year where the rest
12:24of the income has been managed carefully
12:26keeps marginal rate on this layer as low
12:28as possible. And, distributions from
12:30Michelle's holding company can be timed
12:32for years when Michelle has room in her
12:34lower brackets to absorb them. The
12:36entire system works because each
12:38spending level is funded by the account
12:40type that is most tax efficient for that
12:42specific purpose. Government benefits
12:44and low-bracket RRSP withdrawals cover
12:47the essentials. The RRSP and TFSA
12:49together cover the comfortable
12:50lifestyle. And, the non-registered
12:52account and the holdco cover the more
12:54extraordinary spending. Each dollar
12:56comes out of the account where it cost
12:58them the least tax that year. And, the
13:01coordination between these layers is
13:02what produces 184,000 to 188,000 of
13:06actual spending from the same $200,000
13:09that would have produced only 148,000 if
13:11it all came from their RRSPs. But, the
13:13spending levels are not static. And,
13:16what happens over time is actually the
13:17most interesting part of the entire
13:19plan.
13:20In the early years of Andrew and
13:21Michelle's retirement, from roughly
13:22Andrew's age 60 to 67, the portfolio is
13:25paying for everything. There is no CPP
13:27yet because they are delaying it to get
13:29a bigger benefit. And, OAS has not
13:31started. The portfolio is funding lean,
13:34maintain, and luxury, plus the tax bill
13:36that comes with it. Total annual
13:38withdrawals are running at $200,000 to
13:40$220,000 including taxes. On a $5
13:43million portfolio, that's a withdrawal
13:45rate of about 4 to 4.5%. It is
13:47sustainable, but the portfolio is
13:49declining during this period because the
13:51withdrawals exceed the growth in most
13:53market environments.
13:54Then, three things happen in sequence.
13:57First, around age 65 to 67, CPP and OAS
14:00begin flowing in. Combined, there's
14:02roughly $40,000 to $48,000 of annual
14:05income that the portfolio no longer
14:07needs to produce. So, the portfolio has
14:09less to cover. Second, around age 70 to
14:1272, luxury spending naturally scales
14:15back. Andrew and Michelle are no longer
14:17booking three international trips a
14:18year. They're still traveling and dining
14:21out and enjoying life, but the
14:22extraordinary spending that was running
14:23at $70,000 a year is now closer to 20 or
14:2630,000. Third, the RSP balance has been
14:28drawn down deliberately in the years
14:30before CPP and OAS start, which means
14:32future riff minimums at age 71 are
14:35manageable instead of punishing. Once
14:37all three of those changes have
14:39happened, the portfolio stops declining
14:40and it can start growing again. Because
14:43the combination of government benefits
14:44covering the lean floor, reduced luxury
14:46spending lowering the total annual draw,
14:49and a properly managed tax bill means
14:50they are now withdrawing less than the
14:52portfolio is earning. By the time Andrew
14:54and Michelle are in their mid-70s, their
14:56portfolio could be larger than at age
14:5970, despite more than a decade of
15:01withdrawals.
15:03And that turning point is what makes the
15:04whole plan work. The early years are
15:07expensive because the portfolio is
15:08funding everything by itself, but those
15:11expensive years are temporary. They are
15:14buying time for the government benefits
15:15to start, for the luxury spending to
15:17scale down, and well, for the portfolio
15:19to begin its recovery. Understanding
15:21that the plan has a built-in recovery
15:22point is what gives Andrew and Michelle
15:24the confidence to spend $200,000 a year
15:26in their early 60s without feeling
15:27reckless. Instead of draining the
15:29portfolio for good, they are
15:31front-loading the enjoyment into years
15:32when they are the healthiest, and
15:34letting government benefits and lower
15:36spending cover more of their costs over
15:38time. But no plan is complete without
15:40testing what happens when things do not
15:43go perfectly. Every plan needs to be
15:45tested against what happens when life
15:47does not cooperate. The first test is
15:49one that matters most for a plan with
15:51high early withdrawals.
15:53What happens if markets drop 25% during
15:57Andrew and Michelle's first 2 years of
15:58retirement while they're pulling out
16:00$200,000 a year? That is $400,000 in
16:03withdrawals over 2 years combined with a
16:05$1.25 million
16:07portfolio decline.
16:09In 2 years, the portfolio could go from
16:115 million to roughly 3.35 million. At
16:14that point, continuing to withdraw
16:16$200,000 a year works out withdrawal
16:18rate closer to 6% instead of 4% and 6%
16:22is dangerous territory for long-term
16:24sustainability. This is where building
16:26spending in three levels pays off
16:28because Andrew and Michelle do not need
16:30to dismantle their entire retirement.
16:32They need to pull one lever and that
16:34lever is luxury.
16:36If the markets drop hard in the early
16:38years, the $70,000 luxury layer gets
16:40reduced or paused. Maybe the business
16:42class flights become economy for a year.
16:44Maybe the big family trip gets pushed to
16:46next year. Maybe the renovation waits 12
16:49months, but lean stays fully funded and
16:51maintain stays largely intact. So, the
16:54lifestyle they actually care about
16:56day-to-day is protected and because the
16:58luxury layer was always meant to be
16:59flexible and was never built as a
17:01permanent entitlement, reducing it does
17:03not feel like failure. It feels like a
17:05temporary adjustment to a temporary
17:07market drop. Once markets recover,
17:09luxury spending can scale back up. The
17:11plan was built to handle exactly this
17:13kind of volatility because some spending
17:15was always meant to be permanent and
17:17well, some was not. The second test is
17:19what happens if CPP and OAS are lower
17:22than projected. If we reduce government
17:24benefits by 15 to 20%, the lean floor
17:27requires more portfolio support for
17:29longer. The point where the portfolio
17:31starts recovering arrives later and the
17:34overall plan tightens. The plan does not
17:36break, but it leaves less room for
17:38luxury spending in the later years.
17:40And that is the honest assessment of any
17:42plan that relies on government benefits
17:43to take over part of the spending floor.
17:45For CPP, the benefits are backed by a
17:47fund that has been independently
17:49assessed as sustainable for 75 or more
17:51years. For OAS, the risk is more about
17:54clawback than about the benefit
17:55disappearing entirely. The plan can
17:57handle some reduction in those benefits,
17:59but it could not handle losing them
18:00entirely. And the flexibility built into
18:03the three spending levels is what lets
18:04Andrew and Michelle adjust if any of
18:07this happens without it feeling like a
18:09disaster. That is why it's worth
18:10building retirement income in layers
18:12instead of as one flat number. With one
18:14flat number, there's no lever to pull,
18:16so a bad stretch hits every part of your
18:18spending at once. With three layers,
18:21there's always one you can scale back.
18:23When conditions change, you could cut
18:25back the layer that was meant to be
18:26flexible, and the layers underneath it,
18:28well, stay protected. So, that is how $5
18:31million becomes $200,000 a year of
18:33retirement income in Canada. But,
18:35building the income is only one part of
18:37it, because before you can do any of
18:38this, there are six things that need to
18:40be in place, which is why I made this
18:42video right here, where I walk through
18:44everything you need to get right before
18:45you retire at 55, including the tax
18:47window, the account positioning, the
18:49benefits replacement, and the trade-offs
18:51you need to see clearly before you pull
18:53the trigger. Watch that one next. I'll
18:55see you

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