Did you catch The Queen’s Gambit on Netflix recently? It’s a fictional account of a 1960s prodigy who disrupts the world of chess. Apart from drawing millions of viewers, it’s led to a bonanza in chessboard sales — or, in our family’s case, it prompted us to (literally) dust off grandma’s old set.
It also got me thinking about income choices in retirement. As in chess, a lot of moving parts affect retirement — some we can control and some we must contend with. Both domains require strategy, forethought and flexibility.
Decumulation with tax in mind
One of the most important conversations you’ll have with your clients is about switching modes from building retirement savings to drawing from them. Or, as we have come to know it, moving from accumulation to decumulation.
For current purposes, we’ll step past the threshold issue of starting Canada Pension Plan and old age security payments. We’ll also steer clear of the complexities of downsizing a home, selling rental real estate and possibly winding up a business.
That leaves us with three common private savings sources to draw from: an RRSP/RRIF (including locked-in versions), a TFSA and non-registered investments. Respectively, the draw from each of these sources is taxable, non-taxable and partially taxable.
Usually the desire is to maintain a certain lifestyle while minimizing income tax. That could be over a client’s lifetime or include expected tax at death. Either way, the question that arises is how best to draw down these savings sources to achieve the goal?
Planning through the permutations
Effective decumulation is often framed as a search for the optimal order for depleting each savings source before moving on to the next. That’s the way financial planning software algorithms may solve for targets such as maximizing net wealth at life expectancy. In this case, with three savings sources, the software would provide a rank order among six permutations.
But we shouldn’t expect the output to be a set-it-and-forget-it prescription. That would require knowing not only our present but also all future developments.
Consider again the game of chess.
White chooses among 20 opening moves, as does Black to follow, leading to 400 possible board layouts when White considers move number two. By round three, there are 197,281 layout possibilities, and over 119 million two moves later.
Amazing as that is as an example of exponential expansion, it pales in comparison to our years in retirement. Life has far more variables, and more actions that may be taken with each. These include the option to draw from multiple sources from time to time to tactically exploit tax opportunities, rather than fully liquidating each source in succession.
Vision, revision and annual reviews
Chess and financial planning share the need to anticipate, act, observe and adapt. That’s what chessmasters do, always looking forward a few moves and then continually adapting as each turn comes around.
Similarly, as life unfolds in retirement, we will adjust according to changing conditions, with these changes falling under three main headings: personal circumstances; available wealth, as a whole and across savings sources; and the world we live in, in particular any new or modified tax rules.
The most recent data and developments can be fed back into the planning software to obtain an updated starting point.
The critical point to emphasize here is that the process is dynamic, anchored by annual reviews. At each turn, client and advisor plot the best advised course at that point in time, with the full knowledge and intention that they’ll repeat the process from year to year.