3

Let us say I have put away a nest egg like this (all numbers in CAD):
Cash/GIC : 100,000$
Stocks/ETF: 100,000$
Bonds:100,000$
REIT: 50,000
Own rental property : 200,000

Let us say, I wish to retire early with this next egg. What is the optimum way to draw money from this nest egg for life's expenses (without tax considerations)

Should I follow this order:

1.Use my rental income
2.Interest from Bonds,dividends from stocks,REIT
3.Use interest from GIC, keep reinvesting the principal
4.If the above does not cover expenses, then use the cash and don't reinvest GIC principal
5.If it still does not cover life's expenses, sell stocks/reit/bonds
6.If still does not cover,sell rental property.
7. Go back to work

  • That sounds exactly like how I'd do it. I don't know what options you have in Canada (I'm in the US), but make sure you have that cash in a high-interest savings account. Mine earns about 1% a year. – Nick2253 May 7 '15 at 15:49
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    Is your retirement nest egg in entirely taxable accounts, or is some portion in RRSPs, TFSAs, etc.? It would make a difference. – Chris W. Rea May 7 '15 at 23:43
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Drawing down from a nest egg is predominately dealing with 3 issues:

  1. Minimizing Taxes
  2. Deciding if you want to have money left over or using your last dollar on your last breath.
  3. Your age

The much used withdrawal amount used to not deplete your principal is 4%. Some may argue this is too much or not enough but it is regarded as a standard amount. Seeing that you have $500k you can pull about $20k per year using this drawdown percentage. If you can live on $20k then you are set. If not you should build up this nest egg.

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    +1 Welcome to Money.SE. It sounds like your answer is that his concern doesn't matter. He's asking how to allocate withdrawals and you've listed 3 important 'other' issues. – JTP - Apologise to Monica Jul 7 '15 at 14:32
  • Yep I understand that the answer is a bit off topic but I wanted to emphasize that a drawdown strategy ignore taxes is not very useful. Similar to "Ignoring that humans can't fly how can I flap my arms fast enough to fly." – ebeard Jul 8 '15 at 15:54
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I generally agree with your order, but @Chris W. Rea has already alluded to the point that if you have money in an RRSP/TFSA that'll make a difference.

If you can transfer your money around without incurring too many penalties (talk to your bank) you'll want to have any funds that pay large dividends in your TFSA. Fill up the remaining space in your TFSA with all your equities that have a high growth rate. Then fill up your RRSP with your other high growth rate funds. If you have a spouse and their RRSP isn't full open a spousal RRSP and max that out in the years that you're still working/have the highest level of income.

1) Dividends from your TFSA will be tax free. If your income isn't high enough to pay tax don't touch this fund. If it is high enough to pay tax then draw down the payouts from your dividends first since it's tax free income.

2) Try to determine whether your income later in life is likely to be higher or lower than it is now. If it's likely to be lower later in life then hold onto your RRSPs and touch those last. If it's likely to be higher start drawing down your RRSPs to cover expenses until you're going to get bumped into a higher tax bracket. Supplement with cash from any remaining sources.

3) Consider reorganizing your money in your cash/GICs account. Putting the cash portion in a Money Market fund might earn you between 1-2% a year, and should remain fairly liquid for ongoing expenses.

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Hmm, if your financially savvy enough to have saved up half a million dollars, I'd think you would be savvy enough to spend it wisely. :-)

I think I'd spend the cash before running down stocks and bonds, as cash almost surely has a lower rate of return.

I'd look into what rate of return you're getting on the rental property versus what you're getting from other investments. If the rental property has a lower return, I'd sell that before selling off stocks. (I own a rental property on which I am losing money every month. I'm still paying a mortgage on it, but even without that, the ROI would be about 4% under current market conditions.)

Besides that, your plan looks good to me.

Might need to add, 8. Beg on the streets, and 9. Burglary.

  • So, over some time, a few years or so, he'll have an asset allocation that has zero cash? – JTP - Apologise to Monica May 8 '15 at 2:11
  • Of course I wouldn't run cash down to zero. Okay, perhaps I should have been more clear: I wouldn't run ANY asset category down to zero while still having significant money in others, unless that asset was performing very poorly. You always want to keep some balance. – Jay May 8 '15 at 3:39
  • Well, rental property may have lower return, but it also has lower risk. The rent comes in every month almost guaranteed, particularly in downtown Toronto. So I don't think you should sell off the rental property so fast. What would you do with all the cash from the sale? But it in stocks? – Victor123 May 8 '15 at 14:10
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    I own a rental property, and I have found that the risk is extremely high. Maybe the law and the market conditions in Toronto are different. But where my property is, in Ohio, if a tenant decides to quit paying the rent it takes months to get them out. And all sorts of maintenance costs can come up pretty unpredictably. Like last year the main incoming water line broke and it cost me $3000 to replace. A stock may give a low return, but unless you bought on margin, you do not have to worry about a sudden expense to maintain the stock. – Jay May 8 '15 at 17:24
  • @Jay yes, owning rental property can be very risky. imgur.com/gallery/mTSAmeE – RonJohn Sep 22 at 21:12

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