When the RRSP Meltdown Doesn’t Melt

Claire retired at the end of 2022, age 60, with $600,000 in her RRSP. She sat down with me to build her decumulation plan and we landed on a strategy that sounds counterintuitive to most retirees: spend down the RRSP aggressively between 61 and 69, while intentionally delaying CPP and OAS to 70.

The logic behind the “meltdown”:

• Smooth out her tax rate over her lifetime. Rather than a low-income decade followed by a high-income collision, draw the RRSP down while her other income is low.
• Shrink the eventual RRIF balance before mandatory minimum withdrawals kick in. A RRIF that's still large in her 70s, combined with CPP and OAS, is a recipe for a much bigger tax bill down the road.
• Let CPP and OAS bake in the oven until 70. Delaying both means larger, inflation-indexed, guaranteed government benefits for the rest of her life. Arguably the best “investment” available to a retiree.

So, Claire and I set the withdrawal schedule: $48,000 in 2023, $50,000 in 2024, $52,000 in 2025, and $54,000 in 2026 – taken monthly, on the 15th.

On a $600,000 portfolio, an 8% withdrawal rate in year one is aggressive by almost any standard. But calling this an “8% withdrawal rate” makes the strategy sound more reckless than it actually is.

Claire wasn't trying to establish an 8% perpetual withdrawal rate. The deliberately high withdrawals were concentrated in the years before CPP and OAS began, when her taxable income was relatively low.

The obvious risk: draw it down too fast, and there's nothing left to “melt” by the time she's 69.

Fast forward three-and-a-half years after the exact opposite of a poor sequence of returns happens. The RRSP meltdown didn't melt, it expanded.

The numbers

Claire's RRSP is invested in Vanguard's Growth ETF (VGRO), an 80/20 global growth fund. Using the Modified Dietz method, which accounts for the timing of her monthly withdrawals, here's what actually happened:

In three-and-a-half years, Claire has withdrawn $181,500 from her RRSP – and the account is worth $810,500, up $210,500 from where she started.

Go figure.

Why the meltdown didn't melt

Of course, none of this was inevitable in our planning. It's simply what almost four consecutive years of strong VGRO returns (13.4%, 20.2%, 16.8%, and 10.6% so far) look like when they land on top of a well-timed withdrawal strategy.

Markets could just as easily have handed Claire two or three negative years, and this would be a very different (and much more cautionary) blog post. That's the caveat with any sequence-of-returns story: we're looking at one particular sequence.

But that's exactly the point of the story. The retirement plan wasn't predicated on a forecast that markets would cooperate. It was built on the idea that Claire's tax situation and government benefit entitlements, not her portfolio's short-term returns, should drive the withdrawal decision.

The RRSP meltdown was intended to smooth taxes and maximize guaranteed income, with the portfolio doing whatever it was going to do in the background.

As it turns out, in Claire's case, the background did some very heavy lifting. She's taken well over six figures from her RRSP to live on, and the account has more money in it today than the day she retired.

When she turns 70, she'll have maximized the age-related increase available by delaying CPP and OAS. Both benefits will also be inflation-indexed, providing a larger stream of guaranteed income for the rest of her life.

And that's an important distinction: the goal was never to make Claire's RRSP balance as small as possible. The goal was to optimize her after-tax retirement income. A smaller RRIF that produces manageable taxable income can be far more useful than a large RRIF that forces big withdrawals alongside CPP and OAS.

A few takeaways

I think this case is worth sharing right now for a few reasons, especially for retirees sitting on the sidelines worried about a large RRIF balance or a future tax/OAS-clawback collision:

The sequence of returns cuts both ways. Most of the conversation around decumulation risk focuses on the downside because a bad sequence of returns early in retirement can permanently damage a plan.

Less discussed is what a good sequence does. Four strong years in a row did a lot of positive work and is worth talking about.

“Doing nothing” isn't the safe default it feels like. For retirees stuck in analysis paralysis, leaving the RRSP alone (or drawing minimums) can feel like the prudent choice next to an 8%+ initial withdrawal rate.

But inertia has a cost too: a bigger RRIF balance to manage later, reduced income from government benefits, and a tax bill in your 70s that's larger than it needed to be.

Claire's account is worth more today than when she started, and she still managed to shrink her future RRIF and defer CPP/OAS to their age-70 amounts. The “aggressive” path and the “safe” path aren't always where you'd expect them to be.

I suspect many retirees are in a similar boat, with RRSP or RRIF balances that you intended to meltdown over the past three-and-a-half years. But the meltdown didn't melt.

Which raises the natural question: Should Claire spend more, now that the plan is ahead of schedule? Or should she simply stick with the original plan and let the extra portfolio value provide a larger margin of safety for whatever the next decade brings?

That's a post for another day, but let me know your thoughts in the comments section.