Saving for retirement is just the first step - planning how to withdraw the money is important too

For most Canadians, the journey toward retirement is centred on building wealth, saving diligently and making smart investments.

This is known as the “accumulation” phase—a well-covered topic in the world of personal finance.

But once retirees reach their golden years, a new challenge emerges: how to best withdraw those funds in a sustainable and tax-efficient way. This phase, known as "decumulation," is just as crucial to a retiree’s financial well-being as the accumulation phase. A well-thought-out decumulation strategy can make the difference between financial security and uncertainty in retirement.

Why decumulation deserves equal focus

Many retirees spend decades in the accumulation phase, building assets through RRSPs, TFSAs, pension plans and other investment accounts. Unfortunately, much less attention is often given to the decumulation phase, even though it requires just as much strategy and planning.

Without a proper decumulation plan, retirees risk depleting their savings too quickly, paying more in taxes than necessary and leaving less behind to their loved ones. To maximize the funds available in retirement, Canadian retirees need a thoughtful, carefully managed withdrawal plan that considers taxes, investment growth, longevity, and lifestyle needs.

Building an ideal decumulation plan—Key steps

Crafting an effective decumulation strategy is a multi-step process that should be customized to each retiree’s unique circumstances.

Here are the key steps and decisions to consider:

1. Determine retirement income needs—The first step is to assess your income needs in retirement, which often differ from the working years. This includes estimating expenses for essentials like housing, food, and healthcare, along with discretionary spending for travel, hobbies, or family gifts. A thorough budget helps you understand how much income you’ll need each month, setting the foundation for your decumulation plan.

2. Calculate sustainable withdrawal rates—A common approach to determine how much to withdraw each year is to use a sustainable withdrawal rate. The “4% rule” is a popular guideline, suggesting retirees withdraw four per cent of their initial retirement savings each year, adjusting for inflation.

However, this rule isn’t one-size-fits-all, especially in a low-interest-rate environment or when investment returns are uncertain. Some retirees may need to withdraw less, while others with significant savings and shorter life expectancies could withdraw more. Speaking with a professional financial planner can help determine a sustainable rate tailored to your portfolio and goals.

3. Consider tax-efficient withdrawal strategies—Tax implications play a major role in decumulation. Withdrawing from different accounts in a strategic order can help minimize taxes and extend the life of a portfolio. Generally, but not always, it’s tax-efficient to withdraw from non-registered accounts first, then RRSPs or RRIFs, and finally TFSAs. By delaying RRSP withdrawals, you allow these funds to continue growing tax-deferred. Similarly, keeping withdrawals from TFSAs until last can help protect tax-free income. Again, everyone’s situation is different and a plan should be customized for you.

When possible, retirees can also consider “income-splitting” strategies, such as pension income-splitting or spousal RRSP withdrawals, to reduce the tax burden. Structured withdrawals not only impact how long retirement funds last but can also reduce taxes on government benefits like Old Age Security (OAS).

4. Manage longevity and market risk—Outliving retirement savings is a major concern for retirees and balancing growth with security is a critical part of any decumulation plan. One approach is to keep a mix of assets that allows for growth potential, such as stocks, alongside lower-risk investments like bonds or guaranteed income products.

By keeping some portion of the portfolio in growth-oriented assets, retirees have a buffer against inflation and the rising costs of living over time. Many retirees also choose to set aside a “cash cushion” or maintain a short-term bond ladder to cover immediate expenses, allowing their investment portfolio time to recover if markets decline.

5. Evaluate guaranteed income options—Certain types of guaranteed income products, such as annuities, provide predictable income that isn’t subject to market volatility. While annuities often require an upfront investment, they can ensure a steady stream of income for life, which can reduce stress about market risk and longevity. Annuities aren’t right for everyone, so it’s wise to consult with a professional planner to determine if they’re a good fit for your situation.

6. Review and adjust regularly—Decumulation isn’t a set-it-and-forget-it plan. Retirement circumstances, lifestyle changes, market conditions, and tax laws evolve over time. A regular review—ideally once a year—helps ensure your plan stays aligned with your goals and income needs. An annual checkup can also identify any adjustments needed in withdrawal rates, tax strategies, or spending habits.

Decumulation: The key to a comfortable, sustainable retirement

The decumulation phase can seem daunting, especially after years of focusing solely on saving and investing. But with careful planning, Canadian retirees can create a sustainable withdrawal strategy that maximizes income, minimizes taxes, and preserves assets.

A proactive approach to decumulation will provide retirees with confidence and peace of mind, knowing their financial future is secure.

By giving as much focus to decumulation as to accumulation, retirees can enjoy their retirement years with financial freedom and flexibility.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.