Isn’t paying yourself when you retire as easy as turning on a tap and watching the money flow?

Sorry, not quite.

Let’s assume that, thanks to good luck and smart planning, you’re entitled to retirement income from every one of the most common sources of retirement income (see sidebar). Assume also that, like many Canadians, you won’t start drawing on all your sources of retirement income at once.

So what’s the best order to access your money that will make it last the longest and incur the lowest income tax bill throughout retirement, and give you enough to live on? If you were to start drawing on those income sources one at a time (e.g., first from CPP, second from your RRSP, etc.), you would have 479,001,600 different combinations (I did the math).


A skeptic might say it’s not realistic to assume you’ll have retirement income from every possible source. So, what if you have no pensions, no non-registered savings, no locked-in accounts, no home equity to cash in – and your spouse is in the same boat?  Well, together the two of you have 87,178,291,200 different ways of starting your combined retirement income.

Double yikes! It’s no wonder Canadians have difficulty choosing how and when to turn on their income when they retire.

Think about your retirement income options

I asked award-winning Sun Life Financial advisor Brian Burlacoff for a simpler way to approach the decision about which income sources to start, when.

“When I talk with people thinking about retirement income, I use an analogy that makes this an easier topic to think about,” Burlacoff says. “Picture a room with wooden barrels stacked along the walls. The barrels are of different sizes and each one has a different label on it. There’s a ‘CPP’ barrel, an ‘RRSP’ barrel, etc.

“Imagine that every barrel is filled with water and each has a spigot or tap to release the water. Think of the water in each barrel as the money available for you to tap into, to provide your income in retirement.”

If you have a spouse, it helps to picture your barrels along one wall and your spouse’s barrels along another wall.

Tapping your retirement savings: Where do you start?

Everyone’s situation is unique, Burlacoff says, so he recommends getting personalized advice before making these big decisions. Circumstances are often so individual that the order of the barrels might be different for you than for your spouse. But he says generally speaking, a good starting point is for near-retirees to think about tapping into their barrels, starting with this sequence:

  1. To begin, tap the non-registered savings barrels. (This is money in your savings accounts and any investment accounts that aren’t pensions, RRSPs/RRIFs or TFSAs.) Tap these barrels early, because this money isn’t classified as income by the government, so there’s no tax on it, and you’ll be less likely to trigger the dreaded Old Age Security “clawback.” (Past a certain income threshold, you must give back some or all of your OAS. Read more about repayment of OAS.) To pay the least tax and reap the most rewards, it may be a good strategy to tap both the registered and the non-registered barrels at the same time, so your income remains below the OAS clawback threshold. Again, it's important to get professional advice for your particular situation.
  2. Then, tap into your TFSA barrel. There’s no tax of any kind when you tap this barrel, and it doesn’t trigger the OAS clawback. Tapping it allows you to keep the money you have in your RRSP/RRIF/annuity/defined contribution pension barrels longer – which allows the money in those barrels to continue to grow, tax-deferred.
  3. Then, tap into your RRSP, RRIF, annuity and defined-contribution pension barrels.

What about government and defined-benefit (DB) pensions?

You can’t tap your CPP/QPP barrel before age 60, or your Old Age Security barrel before age 65.

If you have a DB pension, there are also rules for how early you can start drawing from it. Often, it’s wise not to tap the government and DB barrels before you really need to. This is because generally speaking, the earlier you begin these guaranteed pension payments, the smaller each payment will be.

Determining your cash flow in retirement

Some barrels have red taps. Once you turn on those income taps, you can never turn them off – the money keeps flowing at a constant rate. In contrast, the barrels with green taps let you start and stop the flow of money any time you choose. There’s also a third type of barrel, with a yellow tap. Once you turn on a yellow tap, you can’t turn it down below a certain rate of flow, but you can turn it up.

Some taps let you control how much income flows out. The flow rates of other taps are set by government or employer pension plan rules.

Don’t copy your spouse’s retirement income plan

Burlacoff confirms that many couples will be as surprised as I was by this: The ideal sequence for turning on the taps often isn’t the same for both spouses. Without individual advice, it’s difficult to choose the best sequence of income flows for your own situation.

“A lot of people think that retirement income planning is all about rates of return and glossy brochures,” he says. “But it really starts with understanding your expectations for what your retirement will be like, then creating an individual plan that addresses your unique situation. That’s a different conversation than you’d have with your bank teller or investment broker, so it’s important to get comprehensive advice from the right kind of financial advisor. When you’re looking at retiring, that’s about the most important time in your life to get the professional advice of an experienced financial planner.”

I wholeheartedly agree.