Modelling Decumulation Strategies
There are several ways to model decumulation strategies in Snap Projections. The right approach depends on what you and your clients are trying to accomplish.
| Your goal | Approach to use |
|---|---|
| To create a quick plan. | Keep the default withdrawal strategy |
| If you know exactly how much should be withdrawn from specific accounts. | Manually Override the withdrawal amounts on the Planning Page |
| When you want to fund Base Expenses while controlling which account types are used first. | Set the desired Order of withdrawals |
| To manage taxable income to a specific level. | Set the desired Taxable Income Target |
| If you want Snap Projections to evaluate a range of strategies and identify an overall improvement to the plan | Use the Financial Recommendations feature |
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Default withdrawal strategy
The default withdrawal order in Snap Projections follows a tax-deferral strategy that has been shown through research to help minimize the chance that a client will outlive their money in the majority of client cases. The tax-deferral strategy prioritizes using non-registered and then TFSA withdrawals in combination with registered account minimums in order to reduce future taxes payable on investment returns and defer the taxes payable on registered withdrawals.
In most cases, the defaults work great for quick planning. However, if you're able to invest additional time optimizing for a specific goal, you can consider other approaches outlined below to see if they create a more favourable outcome.
You can create copies of your base scenario and then use the Comparing Scenarios tool to determine the optimal strategy for your client's circumstances and to demonstrate the value that they're receiving by working with you.
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Manual Overrides
"I want to withdraw $40,000 from the RRIF each year from age 65 to 70."
A manual override is the most direct way to model a known withdrawal from a specific account.
On the Planning Page, enter the desired amount in the Contribution (Withdrawal) column for the applicable financial asset (don't forget to input the 'minus' sign to indicate a withdrawal). The manual entry overrides any automatically calculated values. Snap highlights overridden cells so you can distinguish them from automatically generated values.
For more details please refer to the article Using Overrides.
Note: Remember to clear any optional overrides before using automated features (such as Sustainable Spending, TFSA Top-ups, Taxable Income Targeting, and/or Financial Recommendations).
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Order of Withdrawal
"I want to draw down registered assets first, then the non-registered account, and the TFSA last."
In the years beginning with the selected CFM Start Age, Snap will automatically withdraw from (or contribute to) assets to reach the desired Base Expenses amount. You can control the order in which different asset types are used by enabling the Order column on the Planning Page.
For more details, please refer to the article Using the Order column.
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Taxable Income Targeting
"I want to draw down registered assets first, but I don't want to trigger OAS clawback."
When you want to coordinate decumulation of financial assets with CPP/QPP, OAS, and defined benefit pension plans to reduce your clients’ lifetime tax burden, you can set a Taxable Income Target, and Snap will automatically adjust cash flow to stay as close to that target as possible.
You can use this feature to explore a range of decumulation strategies. For example, you could set a target near the top of a marginal tax bracket or under the OAS clawback threshold and allow Snap to determine how much additional registered income is needed to reach that target.
For more details, please refer to the article Taxable Income Targeting.
Note: Taxable Income Targeting does not change Base Expenses. It focuses on managing the taxable income within the projection: if the target is above the client's expenses, for example, then the excess will be allocated to other financial assets.
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Financial Recommendations
"What strategy could improve my overall outcome?"
This approach is broader than the others. Financial Recommendations feature tests a range of possible strategies and looks for a combination that maximizes the client's Estate After Tax at the selected age, without changing the client's lifestyle.
For more details, please refer to the article Financial Recommendations.
Note: Financial Recommendations applies the decumulation strategies in retirement only. Recommendations for Taxable Income Targeting and Withdrawal Order begin in the first year that the client (or spouse) is considered retired, or the first year automatic CFM is turned on, whichever is later. It will not evaluate strategies for depleting registered assets prior to retirement, for example.
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Other things to consider when modelling decumulation strategies in Snap Projections
- You can combine any of the above mentioned methods to create truly custom and more complex decumulation strategies for your clients.
- Required withdrawals still apply. RRIF minimums and LIF maximums are still enforced when applicable and regardless of the overrides or taxable income targets set.
- As a best practice in Snap, if the client doesn't already have a non-registered account in the projection, you're best to add a $0 account on the Scenario Setup -> Assets page. This allows Snap to use any of its automated features effectively.
- Rates of return on the financial assets matter for certain strategies. So, be mindful of the rates of return you set up in Scenario Setup -> Assets.
- In some cases, you may want to show your client their projected Base Expenses amount for each year based simply on pension income, government benefits and RRIF/LIF minimum withdrawals. For this, you can turn off automatic cash flow management.