Retirement withdrawal strategy considering my unusual situation? (Long post)

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Bobetpine
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Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by Bobetpine »

Hi all,

My GF and I are in the same situation. She is retiring in July 2018 at 55. I'm 51 soon. My goal is also to retire at 55 (April 2022).
I maintain both our Couch Potato Portfolios, rebalancing twice a year.

We work at the same place (Quebec government), have the exact same salary (80k each).

We have a small DB pension plan. I call it small because my GF will get 20% of her annual salary (she worked there for 10 years only) and I will get 40%.

The problem is that retiring at 55 comes with a hefty penalty. 4% a year x 5 years for my GF= 20% less. So it comes up to 16% if she starts receiving her work pension at 55 instead of 60. On my part it's even worse because the rules are going to change before 2022: it will be 6% a year (starting July 2020) x 6 years (the minimum age for undiminished pension will go from 60 to 61 starting July 2019).

So for me it would be 6 years x 6%= 36%.
40% minus 36%= 25,6%

BTW the pension plan is indexed this way : according to the more profitable of the 2 following formulas:
50% of the Pension Index (PI); 
the PI, minus 3%.

So we decided that since our nest eggs are not THAT big, since our pension plan is not fully indexed and that longevity risk is really a concern because of that, we will live the first 5 years (6 years in my case) each on our nest egg. Then her work pension would be 20% for life instead of 16%. Mine would be 40% instead of 25,6%.
We also expect to file for Quebec Pension Plan and CPP at 65 to get the full amount, precisely because of the longevity risk.

The reason I wrote in my post title that we are in an unusual situation is that everybody I talk to seems stunned by the idea to not get the DB pension plan as soon as we retire. (you should have seen the look on the face of the lady at our HR office...disbelief...)

We own a townhouse (300K) and a cabin (200k).
Debt: None.

Tax Rate: Federal :
15% on the first $45,282 of taxable income, +
20.5% on the next $45,281 of taxable income (on the portion of taxable income over $45,282 up to $90,563), +

20% for Quebec rate

Provincial Residence: Quebec

We actually spend 35k each to cover all our expenses (including cotisations to the DBPP). We expect to spend the same in retirement (money saved from expenses we won't have to make anymore like work clothes, professional permit to practice, DBPP etc will go on trips abroad and a RV).

What I'm unsure about is how to withdraw from our accounts in retirement.
Let's take my GF's account, for example, as she'll retire first.
Total: 600K.
RRSP: 330K
TFSA: 70K
Unregistered account:200K

Asset allocation: 65% bonds/GIC ladder and 35% equities (22% World ex-Canada and 13% Canada)

70% of fixed income is in the RRSP (255K).

We met with a financial advisor last year to get the answer to the famous question "do we have enough to retire". He said yes but he also said that since we are going to need only 35K a year each we should withdraw from our RRSP in the 5 years (6 in my case) when we will be without any salary.

Fine. So we set up a GIC ladder with 35k rungs. (I know that we'll pay taxes on the 35k but we could sell some ZAG units if need be).

Ok so my GF is retiring in July. From now until then, she'll earn 40K+. Starting August, she'll use an August-maturing 20K rung that's in her unregistered account to live until 2019.

In January 2019, she is going to tap into her RRSP since her taxation level is going to go down dramatically (no more work income).

That's the plan for the first 5 years (2019 to 2023). At the end of 2023, at age 60, her RRSP would then be 155K (assuming a 0% performance, for illustrating purposes).

First question:

Do you agree with the advisor that said that we should use the RRSP to fund our first 5 or 6 years after retiring from work? Why?

Second question:

If we use a 35 or 40k rung each year then our equity allocation will go up. If I don't rebalance, the fixed income part would go down from 65% to 50% in those 5 years.

I read somewhere that as you age, you should have a higher % in equities.

For the first 5 (6) years , should I stick to a 65/35 fixed income/equity allocation and only then, when the DB pension plan kicks in, switch gradually to a "riskier" portfolio?
If the answer to this question is yes, then I should sell some equities every year (and buy a new 5 year GIC rung) to compensate the GIC rung that has been spent in any given year.
If the answer is no, then I'll let the allocation gradually drift towards equities to finally reach a 50-50 allocation at age 60.

Third question:

Where should the TFSA contributions come from, each year? RRSP account? Unregistered account? Is the answer the same for the first 5 (6) years and after the DB pension plan kicks in?

Fourth question :

In 2022, when I retire, we look forward to buy an used class A Rv. We expect to pay around 80-90K. We also plan a 20K (each) vacation to Polynesia.
From which account should that money come from?

Thanks a million times for any comment or advice. I'm here to learn.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by freedom_2008 »

Bobetpine wrote: 07 Jan 2018 17:36
The reason I wrote in my post title that we are in an unusual situation is that everybody I talk to seems stunned by the idea to not get the DB pension plan as soon as we retire. (you should have seen the look on the face of the lady at our HR office...disbelief...)
I have heard others saying that they regret taking CPP and/or indexed pension earlier with reduction. If longevity is your major concern, then delay taking the indexed pension and CPP to avoid reduction makes good sense.
Bobetpine wrote: 07 Jan 2018 17:36 First question:
Do you agree with the advisor that said that we should use the RRSP to fund our first 5 or 6 years after retiring from work? Why?
I would agree with the advisor.

Why?
1. You do need the money to live
2. Isn't that the whole purpose of RRSP saving, put them in with high tax refund (in your case $80K/yr income when working), and take them out with low tax payable (in your case $35K/yr income when retired)?
3. To base RRSP withdrawal amount on your other income so the total income is under the first tax bracket, to minimum income tax, for age 55 to 60, 60 to 65, and 65 plus, if possible.

I always wonder about the accuracy when people include RRSP as part of the net wealth. As depending on the MTR, up to 40% or more of one's RRSP really belongs to CRA.
Bobetpine wrote: 07 Jan 2018 17:36 Second question:
I read somewhere that as you age, you should have a higher % in equities.
I heard the opposite.
Bobetpine wrote: 07 Jan 2018 17:36 Third question:
Where should the TFSA contributions come from, each year? RRSP account? Unregistered account? Is the answer the same for the first 5 (6) years and after the DB pension plan kicks in?
We use RRSP money to fund TFSAs. You can also do contribution in kind (from RRSP to a regular account and then to TFSA).
Bobetpine wrote: 07 Jan 2018 17:36 Fourth question :
In 2022, when I retire, we look forward to buy an used class A Rv. We expect to pay around 80-90K. We also plan a 20K (each) vacation to Polynesia.
From which account should that money come from?
You said "We expect to spend the same in retirement (money saved from expenses we won't have to make anymore like work clothes, professional permit to practice, DBPP etc will go on trips abroad and a RV)." Keep your words is probably a good idea. :wink:

My two (no-pension) cents.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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I agree with using the RRSP for funding retirement until 60/61 to allow DB pensions to start on a non-discounted basis AND to take advantage of a lower tax bracket on fully taxed RRIF withdrawals (RRIF since I believe you can get the pension credit despite not being age 65). Your DB pensions alone will fund retirement (20%+40% of $80k) and when you add QPP/CPP/OAS at 65 (or 70 if you choose), that provides a buffer.

Much depends on your risk tolerance (sleep at night factor) but I would let your equity/FI ratio creep up while drawing down your GIC ladder given all your pension income is actually Fixed Income. A 50/50 allocation is highly conservative when you have so much pension income coming in.

It doesn't matter where your TFSA contributions come from. Cash is cash and 'transfer in kind' is really the same as using cash (transfer in kind just saves $20 in commissions if you are a DIY investor in stocks). Just plan to fund annual TFSA contributions as if they are an 'expense'.

By the time you start collecting your DB pensions, you probably won't need to tap into the capital of your non-reg account or TFSAs unless you want too. Strip off the income those portfolios deliver to supplement your income.

As to the story line of increasing equities as you age, versus the long standing conventional wisdom of increasing FI as you age, it depends on, besides your risk tolerance, how much you count on your portfolios to meet your cash flow needs, and how long you will need to fund your retirement using your portfolio.

The basis of 'increasing equities with age' is that as you get older, you do not have as many years left to fund and therefore a prolonged bear market in equities doesn't leave you high and dry years too soon. Someone at age 60 might be planning on 35 years of retirement funding. Someone at 80 only needs to plan on ~15 more years of funding. It would seem then that one could theoretically take at least twice the amount of risk on their portfolio at age 80 than at age 60. The concept is worth investigating further. There are threads in this forum on this subject if you search for them.

A few of us here, e.g. ghariton and myself, essentially believe in that theory. Our portfolios maintain an absolute amount of fixed income (not percentage of portfolio) to help fund X years of a prolonged bear market (with X being what you want it to be, e.g. 3, 5, 10 years). Beyond that, let the equities run with capital appreciation. Example: I am almost age 69, retired almost 12 years with a smallish DB pension that just about covers my base costs. I have set aside X of fixed income and have allowed my equity allocation to rise from about 65% to 85% currently. I have been tapping into it ever so slightly to keep my FI at its fixed value and to buy one off type luxuries as/when I want too. Whether I get to 90% equity eventually I don't know but think I am now up against my risk tolerance and will re-balance from now on. I am assuming 20-25 years of life left.

There is another concept worth exploring on our very own Finiki.... and that is Variable Percentage Withdrawal methodology for spending. It is worth exploring as another set of data points in terms of tapping into your portfolio at some point in time.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by Bobetpine »

Fourth question :
In 2022, when I retire, we look forward to buy an used class A Rv. We expect to pay around 80-90K. We also plan a 20K (each) vacation to Polynesia.
freedom_2008 wrote: 07 Jan 2018 20:20 You said "We expect to spend the same in retirement (money saved from expenses we won't have to make anymore like work clothes, professional permit to practice, DBPP etc will go on trips abroad and a RV)." Keep your words is probably a good idea. :wink:
I should have written: Besides 2 big expenses on the year I retire (RV and Polynesia vacation) we expect to spend the same in retirement

:D
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by Bobetpine »

freedom_2008 wrote: 07 Jan 2018 20:20
3. To base RRSP withdrawal amount on your other income so the total income is under the first tax bracket, to minimum income tax, for age 55 to 60, 60 to 65, and 65 plus, if possible.
Talking about minimum income tax, how do you figure out exactly what your "other income" is?
From what I understand, what is important is interests, dividends and capital gains that are paid in any given year in your unregistered account.
If I look at my BMO IL account, I can see how much, for example, VCN distributed in dividends.

Is there a way to know the exact total amount that the CRA will consider (since I get interest/dividends/CG from different GIC, ETFs etc), without having to do all the math yourself? And the other problem is that you get to know this amount only by the end of the year.

Let's say that in 2017 I received around 4K in interest/dividends/CG in my unregistered account. I then expect it would be pretty much the same in 2018. Does that mean that we should withdraw 5-6K less than the maximum to still be in the first tax bracket and then wait in the final days of the year to withdraw the precise amount that we are allowed to?

Crossing the tax bracket by 1 or 2k is not that bad but especially in the first years where I'll learn how this works, I don't want to withdraw something like 6-7K over the first tax bracket.

Thanks again
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by gobsmack »

Bobetpine wrote: 08 Jan 2018 08:48 Is there a way to know the exact total amount that the CRA will consider (since I get interest/dividends/CG from different GIC, ETFs etc), without having to do all the math yourself? And the other problem is that you get to know this amount only by the end of the year.
You have to do the math yourself and estimate what your income will be. For GICs, it should be pretty straight forward given that you know the interest rate and it doesn't change. For ETFs like VCN, you will have to come up with an estimate. Keep in mind that, as the end of the year approaches, you will have a pretty good idea of what your income for the year will look like, which gives you the chance to do some last minute tax planning with better information then you may have had at the beginning of the year.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by AltaRed »

Tax planning is good but I would never let the tax tail determine how much I might spend each year, or whether my dividend/interest/other income for the year bumps me up into another tax bracket. It is like saying you won't put more than 60 litres of gas in your car even though it will take 65 litres to get to your destination. Retirement is about enjoying the fruits of your labour and budgeted spending should be based more on what your portfolio will deliver for you than bumping into another marginal tax bracket.

As others mention, dividend/interest/other income will not vary that much from year to year, but it will vary some as ETFs can spin off differing amounts of re-invested distributions, cap gains distributions, etc. in any given year as indices change and companies are moved in or out of the index. I've never looked at the relative size of the year to year variances for myself but overall it wouldn't be more than 10%. If you are not drawing down much on your capital from year to year, you should actually be receiving more investment income each year due to dividend growth and increasing interest rates (or the opposite in a bear market). Generally speaking, you should be happy to be paying more tax from year to year because that indicates you are growing income from year to year.

As Gobsmack mentioned, you can do a bit of tax planning near the end of the year as you see how the numbers are adding up, but I'd suggest trying to overwork this is counter-productive.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by gaspr »

:thumbsup:
Good advice AltaRed. In your first post you mentioned that RRIF income prior to age 65 might be eligible for the pension credit. Is this true?
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by freedom_2008 »

Bobetpine wrote: 08 Jan 2018 08:48
Talking about minimum income tax, how do you figure out exactly what your "other income" is?
I agree with AltaRed that there is no need for over-planing. Once you are at the end of the first year, things should be pretty clear and simple.
Last edited by freedom_2008 on 08 Jan 2018 12:54, edited 1 time in total.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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gaspr wrote: 08 Jan 2018 12:38 In your first post you mentioned that RRIF income prior to age 65 might be eligible for the pension credit. Is this true?
I checked and unfortunately, it is only annuity income arising from the death of a spouse. You have to be 65 to get it otherwise.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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AltaRed wrote: 08 Jan 2018 12:53
gaspr wrote: 08 Jan 2018 12:38 In your first post you mentioned that RRIF income prior to age 65 might be eligible for the pension credit. Is this true?
I checked and unfortunately, it is only annuity income arising from the death of a spouse. You have to be 65 to get it otherwise.
When they or one of them start to take their DB pensions that income would be eligible for the Pension tax credit and its splittable. IIRC I thought that if you didn't have income eligible for the Pension tax credit there was a strategy to take out small annuities to generate just enough to qualify for the maximum deduction.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by AltaRed »

I think the OP already knows DB pensions will qualify when they take them at age 60, or 61 per their plan.

One needs to be 65 for using RRIF proceeds to qualify. http://www.taxplanningguide.ca/tax-plan ... on-credit/ and http://www.advisor.ca/tax/tax-news/unde ... dit-141669
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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AltaRed wrote: 08 Jan 2018 13:09 This is the OP's spouse?

http://www.moneysense.ca/save/retiremen ... pfm_invest
Hey thanks for pointing that out! I wrote to Moneysense 2 months and a half ago and on the exact day that I get discouraged and decide to ask my questions here, my questions get answered on MS. Life is really full of coincidences...

That being said, I'm not overly surprised that some advice is different than what I got here.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by Bobetpine »

One part of the advice that I get on MS is not completely accurate:
At age 60 you’ll start your Quebec pension of $17,000 annually so you’ll only need $13,000 from your portfolio plus an amount for taxes, and once you start CPP/QPP and OAS you may not need much at all from your investments.

At 65, my DB will coordinate to QPP so instead of 17K/year I'll get 13K in DB pension. Add CPP + QPP and it adds up to 30K. She would need to withdraw around 10k a year.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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Bobetpine wrote: 08 Jan 2018 20:19 At 65, my DB will coordinate to QPP so instead of 17K/year I'll get 13K in DB pension. Add CPP + QPP and it adds up to 30K. She would need to withdraw around 10k a year.
That is what the remaining portfolio will be for, and why I also suggested to consider about that time, to take a look at VPW (Variable Percentage Withdrawal) for safe withdrawal amounts (which varies with asset allocation and age). My guess is there will be plenty there to get $10k/yr. A combination of a dividend ETF (like XDIV) and a bond ETF (like XBB), or if you Vanguard or BMO better, their equivalents......may be all it would take at that point in time.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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AltaRed wrote: 08 Jan 2018 21:55
That is what the remaining portfolio will be for, and why I also suggested to consider about that time, to take a look at VPW (Variable Percentage Withdrawal) for safe withdrawal amounts (which varies with asset allocation and age).
I checked the VPW page on Finiki.
Why do they say this:
For the purposes of VPW calculations, the money set aside in the GIC ladder should not be considered as part of the portfolio.
?

Then it is unclear to me how I should use the spreadsheet for the first 5 years of retirement since the GIC ladder is going to be used to fund those 5 years?

Thanks again.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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I suggest that once you are done with 'bridging the gap' with spending of your GIC ladder, and you start to collect DB pensions, then use VPW to establish your spending 'capability' for the next 30 years. VPW is not all that useful for that interim period.

Example: At the end of the bridging period, and the start of the DB pension, you will have $X in your portfolio consisting of perhaps 65/35 equity/fixed, including any remaining GIC ladder as part of your fixed income component. I don't subscribe to VPW commentary that excludes GICs as legitimate fixed income.

Using $X, your asset allocation, and your age, you can then calculate how much you can withdraw from your portfolio, i.e. safe ceiling. You may not have to do that once you figure in your DB pension payments, and ultimately CPP and OAS (which are fixed income). It is your spending needs, net of your annuity income, that you need to get from your remaining portfolio....and spending needs obviously includes income taxes due each year too. You may find that your and your spouse's annuity income will meet the vast bulk of your cash flow needs, with no need to tap into much of the VPW annual allocation. The beauty of VPW methodology is that it is a new calculation every January.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by Norbert Schlenker »

Interesting questions and replies above. I'll throw in a couple of observations.

1. It's not clear to me that the wife's choice to defer collecting the pension is correct. It's borderline advantageous at best. Taking the pension immediately will stack up $64,000 + investment earnings over the next five years, and that needs to be weighed against an extra $3,200 a year from age 60 to death. That's a near thing at best. (OP's likely deferral is IMHO obviously correct given the larger discounts he faces for early retirement.)

2. There was agreement above that some withdrawals from RRSPs in the early years is a good idea, but no rationale given for why. The reason to take the money early is that graduated tax brackets are a use-it-or-lose-it option every single year. Unless an early retiree is near penniless, if s/he has the option to declare income up to the top of the first tax bracket, then that should be used. The chances are minor that tax rates on the first ~$40k of income will get remarkably lower in future. If you don't take something from an RRSP into income in a year when you're only in the first bracket, then you know that it's going to be forced out in a year to come and the BEST that you will do then is first bracket rates with a chance at much worse.

(I'll tell a story here from recent personal experience, because it's apropos point #2. A friend nearing 70, retired for about ten years, comes to me asking for some financial advice on another subject. She's got a big portfolio, part registered, part taxable, managed competently by well known investment counsel at plausible fees, who have worked for nearly ten years to put spending money into her hands while minimizing taxes. Her entire income has been managed to keep her in the first bracket, maybe slightly into the second bracket, for ten years. This is bog-standard procedure, pulling money out of taxable accounts while leaving the RRSP alone to grow and grow. Now mandatory RRIF withdrawals loom. The first year it happens, she'll be into the third, perhaps even fourth federal bracket, and that situation will last for the rest of her life. Letting the RRSP grow without being touched is, in hindsight, a costly mistake. Now she never had the option of "using up the first bracket" because it was already used up, but it would have been obvious even ten years ago that "using up the second bracket" was also appropriate for her. She can't recover those ten expired options, which I would estimate are cumulatively worth about $60,000.)
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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Norbert Schlenker wrote: 13 Jan 2018 17:43Her entire income has been managed to keep her in the first bracket, maybe slightly into the second bracket, for ten years.
It might be helpful if you can share how this income was managed? We can all speculate but it would be better to have some facts...
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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I haven't seen anyone's calculations include the fact that once you are taking a db pension, there is the annual cost of living increase which is added to your pension. For 2018, 1.5 or 1.6% of last year's pension amount is added to both my pensions. Over a five year period, that adds up. That's money you are leaving on the table if you don't take your pension- plus the $2000 pension tax credit mentioned already. Not sure how or if you have provincial medical premiums to pay in Quebec, but when you retire here, you can get your medical premiums deducted from monthly pension payments- so pretty painless that way. :wink:
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by AltaRed »

IF indeed the COLA increases are not factored into the deferred values on the OPs' DB pension plans. I suspect they might be IF they are fully integrated with CPP. Bruce may be able to comment on that albeit pension plan terms can all vary somewhat. It would be worthwhile for the OP to find out how that calculation is done, i.e. if anything is being left on the table.

Most of us in the private sector can only dream of COLA provisions in our DB plans.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by chufinora »

AltaRed wrote: 14 Jan 2018 18:17 Most of us in the private sector can only dream of COLA provisions in our DB plans.
Most of us in the private sector can only dream of COLA provisions in our DB plans. Fixed that for todays reality.

Sorry for the digression ... could not resist
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

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Good one! That has become the reality for most.
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Re: Retirement withdrawal strategy considering my unusual situation? (Long post)

Post by Norbert Schlenker »

kcowan wrote: 14 Jan 2018 08:57
Norbert Schlenker wrote: 13 Jan 2018 17:43Her entire income has been managed to keep her in the first bracket, maybe slightly into the second bracket, for ten years.
It might be helpful if you can share how this income was managed? We can all speculate but it would be better to have some facts...
From what I could tell, the withdrawals were handled either through dividend income or via some very careful capital gains tax management. In a separately managed account with a host of individual security positions, there are always opportunities to sell something that's in a loss position.
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