One reason why retirement planning is so challenging to think about is because we often go from receiving one income stream (our T4 salary income) to juggling several different income streams throughout retirement. 

Even more confusing is the fact that those retirement income streams often can (or should) arrive at different times and may have different tax treatments.

Why do you need a retirement plan?

Consider that you might draw an income from the following sources in retirement:

• Defined benefit pension
• RRSP or RRIF
• LIF
• TFSA
• Non-registered investments
• Non-registered savings
• Corporation
• CPP
• OAS

Let’s explore a potentially dizzying array of decisions.

Members of a defined benefit pension plan will have to make a tricky decision about when to retire (early and reduced, earliest unreduced, or normal retirement date). Then they’ll need to select from a menu of joint and survivor options (100%, 67%, 60%, 50%) with or without a 5, 10, or 15 year guarantee if you die early.

Those with a spouse are required to choose a joint life pension option that leaves their spouse a percentage of the monthly pension payments if they die first, however your spouse can sign a waiver giving up their rights to this benefit.

You can withdraw from an RRSP at any age before it must collapse at the end of the year you turn 71. 

A RRIF conversion must be done at that time, but it can happen earlier and might make the most sense at 65 when RRIF income becomes eligible pension income and can be split with a spouse or common law partner.

A LIRA to LIF conversion has to wait until at least age 55 in most cases, and similarly must be done by the end of the year you turn 71. This conversion can also come with another decision around unlocking 50% to 100% of the LIF (depending on the jurisdiction) to move into a more flexible RRSP or RRIF.

TFSA withdrawals can be done at any time and for any reason, and withdrawals are completely tax free. The added bonus is that you get the contribution room back the following year after a withdrawal is made. But it might be wise to leave your TFSA funds intact to act as a margin of safety or tax-free pot of money for your beneficiaries. 

Small business owners have the added complexity of winding-down their corporation by withdrawing funds personally via dividends.

Those with non-registered investments need to consider capital gains from the sale of stocks or funds that have appreciated in value over the years. Capital gains are taxed favourably, since only 50% (half) of the gain is considered taxable and added to your income (but only when sold). Investment income earned from dividends and interest are taxable in the year received.

Non-registered savings from a regular savings account is money that you have already paid tax on earlier, although as explained above the interest income earned is fully taxable in the year received.

Then there are your government benefits (CPP and OAS) to consider.

You can take your CPP as early as age 60, but it’s often a mistake to do so because of the permanent 36% early take-up penalty. Taking CPP at 65 would be considered your normal retirement age with no penalty. And those who can wait to take their CPP at 70 will see their benefits rise by 42% (plus inflation adjustments).

OAS, meanwhile, cannot be claimed earlier than 65 but will automatically start at that age unless you tell Service Canada otherwise. As long as you’ve lived in Canada for 40 years between 18 and 65 you’ll get 100% of your entitled OAS benefits (before clawback considerations). Subtract 2.5% for every year that you were not in Canada during that time. Delaying OAS to age 70 will lead to 36% more in benefits (plus inflation adjustments).

Putting the Puzzle Pieces Together

In my advice-only financial planning practice I explain to clients that I’m trying to help them fit their retirement income puzzle pieces together in the most tax efficient way to meet their retirement spending needs.

I liken it to trying to get your car out of the parking garage in one of those 3D puzzle games.

Some puzzle pieces need to be moved aside to make room for other income streams to come online.

For instance, it’s now widely accepted that most Canadians are going to get more lifetime income if they delay taking CPP until 70. But I don’t want you to delay living your best early retirement lifestyle until 70 when your benefits kick-in. We’re just going to get the income from somewhere else, like your RRSP or RRIF with perhaps a top-up from non-registered funds.

The result from shifting these puzzle pieces around is that you maximize your lifetime spending and minimize your lifetime taxes.

Indeed, we can fool ourselves into keeping our tax rate extremely low in our 60s by drawing from our non-registered savings and TFSA, only to discover we’ve kicked a major tax problem down the road when the inevitable collision of taxable income from our RRIF, CPP, and OAS begins in our 70s.

Our Retirement Income Plan

My wife and I have more complicated finances than most regular T4 salaried employees because we’re incorporated and have built up significant assets inside our corporation that will need to be withdrawn in retirement.

So we need to be extra careful designing our retirement income to meet our desired lifestyle spending while also keeping tax efficiency in mind.

This takes a delicate approach that is highly influenced by our retirement date, or when we stop earning an income.

Work too long, and the window shrinks to get funds out of the corporation before CPP and OAS and ever-increasing RRIF and LIF minimum withdrawal requirements kick-in.

Retire too early (and spend too much) and you risk exhausting your resources before CPP and OAS come to the rescue.

With that in mind, my idea is to stop working full-time in 10 years (55), work at 50% capacity for five years (60) and then at 25% capacity for five more years (65).

This gradual reduction in earnings while maintaining current spending means that the balance inside the corporation will start to decline as soon as age 56. Ideally, we’d exhaust our corporation before age 70 – but according to the chart shown above we’d still have corporate funds until 78.

That’s not as tax efficient as I’d like, but it’s a direct product of still working in some capacity until age 65. And I think my own sense of purpose and well-being is more important than having the most optimized and tax efficient retirement plan.

In summary: retire earlier if you want to optimize your tax efficiency.

I’d also convert my RRSP and LIRA to a RRIF and LIF at 65 to take advantage of pension income splitting. This means the amount of dividends we’d withdraw from the corporation will decrease to make room for the incoming RRIF and LIF income – allowing our average tax rates to remain smooth and consistent even as new puzzle pieces enter the fray.

CPP and OAS benefits will be moved out of the way (delayed to 70) to allow for these significant withdrawals, which is fine by me because I’ll take the enhanced and guaranteed income later in retirement.

Finally, there’s the TFSA. Unlike some people, we do not treat our TFSAs as an untouchable source of funds. Yes, it makes sense to keep our TFSAs intact as long as possible and take advantage of that tax free growth. But we also want to maximize our life enjoyment, and that will mean using the TFSA to top-up our spending once other income sources dry up.

We also need to consider one-time expenses that are more difficult to plan for such as vehicle replacement, home renovations or repairs, early financial gifts to kids, and bucket list type travel and experiences.

In my view, a TFSA is a great place to draw from to fund those one-time expenses in retirement as the withdrawal is tax-free, does not affect your OAS benefits, and you get the contribution room back the following year.

Final Thoughts on Retirement Income

My wife and I will go from receiving one income stream each in our working years to dealing with a combined 12 different income streams or sources in retirement.

• Corp (2)
• RRIF (2)
• LIF (1)
• CPP (2)
• OAS (2)
• Non-registered savings (1)
• TFSA (2)

Each of these puzzle pieces needs to be carefully placed to maximize growth, maximize income, and minimize taxes. And because life happens and goals change, nobody (and I mean nobody) is going to do this with absolute perfection.

But you can see why even the most financial literate person or the most sophisticated do-it-yourself investor might want to work with a financial planner to build a retirement plan, model out some scenarios to see what’s possible, and to stress-test their own ideas.

Clearly it’s not as straightforward as simply withdrawing 4% from your portfolio and adjusting for inflation. Which portfolio? We don’t have one bucket of money called retirement savings. You might have 8-12 different income sources to consider.

If you’re five years or less away from retirement, it’s worth reaching out to an advice-only planner to help fit all of your retirement income puzzle pieces together. 

‘Our life is frittered away by detail… simplify, simplify.’ – Henry David Thoreau

I’ve fielded all types of questions from clients and readers over the years looking for that one magic hack or some shortcut to building wealth. Usually these half-baked ideas come from a friend, relative, colleague, or an unscrupulous advisor, or a random Reddit thread.

Should I buy a rental property? What about commercial real estate? Airbnb? Private credit? 

Should I do the Smith Manoeuvre? Open a margin account? Trade options? 

Should I buy a whole life insurance policy? Should I borrow from an existing insurance policy? Have you heard of infinite banking?

Should I invest in tech stocks? Crypto? This triple leveraged ETF? Covered calls?

My advice, in general, is that you need to have the basics looked after first before even considering a riskier or more complex strategy. 

That includes having a simple money philosophy to follow:

• Utilize employer matching savings plans (contribute enough to max out the match, but no more).
• Optimize your RRSP (optimizing your RRSP can mean contributing enough to bring your taxable income down to the bottom of your highest marginal tax bracket. Or it can mean not contributing at all if you’re in a lower tax bracket).
• Maximize your TFSA (striving to contribute up to your lifetime limit and, once you’ve caught up, maxing out your annual room each year).
• Prioritize short-term goals (list all of your other goals such as a house down payment, funding a parental leave, a new car, a dream vacation, non-registered investments / early retirement fund, extra mortgage payments, etc. and then acknowledge that you can’t fund them all at once. Prioritize and direct any extra cash flow here).

Inside your RRSP and TFSA, know that investing has largely been solved with low-cost index funds. Buy the entire market for as cheap as possible and move on with your life.

Further to that, investing complexity has been solved with something called an asset allocation ETF (an all-in-one “single-ticket” solution).

These registered accounts are no place to speculate on individual stocks or the thematic fund-of-the-day. If you swing and miss on an investment, you lose that contribution room forever and don’t even get the benefit of claiming a capital loss for your misfortune.

Indeed, you’re going to have a great deal of financial success if you can simply take advantage of your workplace matching plans, optimize RRSP contributions, maximize TFSA contributions, prioritize short-term goals (including your own personal spending and happiness), and invest your retirement savings in low cost index funds.

This other stuff is something I call “what’s next?” money. 

You have a preference for real estate and want to buy a second property? That’s what’s next, after the basics are fully funded.

Your advisor is pitching you on an investment loan? That’s what’s next, after the basics are fully funded.

You want to put some money into the latest thematic fad of the day (AI, psychedelics, clean energy, etc.)? That’s what’s next, after the basics are fully funded (and, please, in a non-registered account and not your TFSA).

I am fighting for simplicity in my financial life. I want all of my investment accounts in one brokerage platform. I invest in a single ETF in each of those accounts. I have a plan to pay off my mortgage within 10 years (and before I retire).

I have no interest in buying a rental property (worst nightmare).

I don’t use leverage. If you’re not satisfied with the investment returns from global equities then perhaps you need to increase your savings rate, not use leverage to try and amplify the gains.

Warren Buffett famously quipped 

“You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”

It’s true. You can get rich by saving a good amount into your RRSP and TFSA and investing in simple low cost index funds. 

Why needlessly complicate your life chasing extra dollars – potentially putting a good financial plan at risk if it doesn’t work out?

As Thoreau said, “simplify, simplify.”

This Week’s Recap:

It has been a while since my last weekend reading update. Since then I’ve published the following stand alone articles:

Your ultimate guide to RRIFs: Strategies, pitfalls, and the secret sauce to retirement income. That one was a big hit.

At the end of the year I updated my net worth and looked ahead to this year’s financial goals.

And I posted my 2024 investment returns along with the returns from Vanguard’s and iShares’ suite of asset allocation ETFs.

Weekend Reading:

A Wealth of Common Sense blogger Ben Carlson shows how good years in the stock market tend to cluster.

Welcome to the roaring 2020s, where every single year has seen a big stock market move (one way or another).

Morningstar shares six retirement financial myths to avoid.

For retirees, why amortization based withdrawal works better than safe withdrawal rates.

Christine Benz shares the best of the Long View 2024 – clips from interviews with financial planners, advisors, and retirement researchers over the past year.

If it’s possible to beat the market, as Warren Buffett has for longer than I’ve been alive, why would anyone settle for boring market returns with index funds?

What a massive cash windfall could mean for your retirement plans.

The Walmart effect: New research suggests that the company makes the communities it operates in poorer – even taking into account its famous low prices.

Finally, one of the top minds in financial planning Aaron Hector shares how he’s providing financial literacy for his kids.

Have a great weekend, everyone!

Global stocks continued the positive momentum from a strong performance in 2023 to deliver another banner year for investment returns in 2024.

The gap between the NASDAQ and the rest of the market shrank, but technology stocks once again led the charge, with the tech-heavy NASDAQ gaining 24.10% (XQQ). That mark was nearly equalled by the S&P 500 posting a 23.40% (XSP) gain of its own in 2024.

Not to be outdone, Canadian stocks rallied and delivered a 21.53% return (XIC), while emerging market stocks awoke from their slumber and returned an impressive 19.20% (VEE) in 2024.

International stocks were the laggard last year, posting a “measly” return of 12.58% (XEF).

On the fixed income side, Canadian aggregate bonds (VAB) were up a modest 4.00%, with most of that gain coming from higher bond yields. Short-term bonds (VSB) had a more impressive 5.50% return in 2024, from a more balanced mix of price growth and interest.

You know that I’m a big fan of asset allocation ETFs as a sensible way for many Canadians to invest. For around 20 basis points (0.20%) in fees, you get a globally diversified and automatically rebalancing portfolio that you can set and forget.

Indeed, if investing has largely been solved with low-cost index funds, then investing complexity has been solved with these asset allocation funds. They’re a true one-stop shop for your investing needs.

Investing passively through index funds allows investors to capture the aforementioned returns, minus a very small fee. That’s a surefire way to beat 90% of investors who invest more actively, incur higher fees and are prone to behavioural issues like performance chasing.

With that in mind, here are the 2024 investment returns for various asset allocation ETFs offered by Vanguard and iShares:

Vanguard Asset Allocation ETFs

Vanguard offers a suite of asset allocation ETFs ranging from 100% global equities (VEQT) to 20% equities and 80% bonds (VCIP).

I’m including the calendar year returns of VEQT, VGRO, VBAL, and VCNS to show the results from their most popular asset allocation ETFs:

Interestingly, each step up the risk ladder earned you an extra return of about 4.5% last year, and about 2% in 2023. Even the traditionally conservative 40/60 portfolio posted double-digit gains again thanks to strong stock AND bond performances in 2023 and 2024.

iShares Asset Allocation ETFs

iShares offers a similar suite of asset allocation ETFs with ticker symbols of XEQT, XGRO, XBAL, and XCNS.

The differences between iShares and Vanguard are slight – iShares’ ETFs cost just 0.20% MER compared to Vanguard’s 0.24% MER, and iShares’ asset allocation ETFs come with a bit more US and International equity, while Vanguard’s asset allocation ETFs have more Canadian and emerging market representation.

Here are the five-year returns for iShares’ asset allocation ETFs:

You can see the returns are nearly identical. XEQT enjoyed a slight performance advantage in 2023 due to its tilt towards the higher performing US and international markets, but VEQT had the edge in 2024 thanks to strong returns from Canadian and emerging market stocks.

Vanguard vs. iShares 3-5 Year Averages

Now that these asset allocation ETFs have been around for at least five years we can start to look at their three-and-five-year average returns for a better cumulative comparison.

After two years of stellar returns, we may have forgotten exactly how bad returns were in 2022, especially for more conservative portfolios. That’s why looking at average annual returns over multiple years can give us a more realistic look at a typical investor’s experience (ideally we have data from 10+ years but here we are).

Vanguard asset allocation ETF 3-and-5-year averages:

These five-year average annual returns are still well above the return assumptions I use in my financial planning assumptions for clients (6.10% for global equities, after fees).

You could say that we’ve pulled forward a few years worth of expected returns. That means we should probably lower our expectations for future returns so that the 10-year average will look more like the 6.10% assumption.

iShares’ asset allocation ETF 3-and-5-year averages:

*Note that XGRO and XBAL were different ETFs with different mandates prior to 2019 and so the “since inception” returns are not a true representation of the new asset allocation mix. 

If you can’t decide between the two, hedge your bets by putting a Vanguard asset allocation ETF in one account type, and an iShares asset allocation ETF in another (or have one spouse pick Vanguard and one spouse pick iShares for a little friendly competition).

Whatever you do, don’t drive yourself crazy switching back and forth between the two chasing past performance.

My Investment Returns for 2024

I’ve been investing in Vanguard’s all-equity ETF (VEQT) since March 2019. It’s a perfect solution for someone like me who wants to buy the entire market for as cheap as possible and move on with my life.

I hold VEQT inside my RRSP, LIRA, TFSA, and corporate investing account. I did not make a contribution to my RRSP (or LIRA, of course) in 2024, but I did actively contribute to my TFSA and our corporate investing account.

As you know, the timing (and amount) of your own contributions will affect your own personal rate of return. So, while I expect my RRSP and LIRA to have a nearly identical return to VEQT’s 2024 calendar year return of 24.87%, the returns on the corporate account and TFSA may be different due to the timing of contributions. Let’s check it out:

• Corporate = 27.05%
• RRSP = 24.80%
• LIRA = 24.80%
• TFSA = 10.86%

Indeed, the corporate account benefited from significant contributions early in the year, while I didn’t start contributing to my TFSA until May.

I switched up the kids’ RESP account at the beginning of 2024 to be more conservative as they enter their age 15 and 12 years. I added short-term bonds and changed the overall mix to about 35% equities and 65% bonds.

We contributed $7,500 to the account in January to catch-up on one year of missing grants for our oldest child.

• RESP = 11.38%

Not bad for going conservative with this portfolio in 2024.

Final Thoughts on 2024 Investment Returns

Most Canadians still invest in actively managed mutual funds through their bank or another investment firm. These funds have a huge hurdle to overcome – their high fees – to match (let alone beat) a passively managed portfolio of index funds.

Your job this month is to pull up your investment statement and look at last year’s returns, along with the returns over the past five years, and see if your portfolio is keeping pace with the returns of an asset allocation ETF.

Make sure you’re comparing apples-to-apples, that is you’re matching up your portfolio’s asset allocation with the returns from a similar asset allocation ETF (i.e. 60/40 to 60/40) to get the full story. No sense comparing your 60/40 portfolio to the NASDAQ 100. It likely wouldn’t be appropriate to invest in 100% tech stocks.

If you’ve reviewed your investment statement and find your returns aren’t measuring up, it might be worth switching to a self-directed investing platform and buying a risk appropriate asset allocation ETF.

I truly believe that pairing low-cost index investing with on-demand financial planning advice at key life stages can lead to successful outcomes for many Canadians. Put that on your New Year’s resolution list for 2025.