It comes up in almost every second meeting. Someone looks at a balance, does quick mental arithmetic, and asks whether they can take ten percent a year.
It’s a fair question. It deserves a real answer, and the real answer isn’t an opinion. It’s a distribution.
So we built one. Forty thousand simulated runs at each withdrawal rate, over thirty years, with the withdrawal indexed to inflation and fees at one percent.
What came back
At ten percent a year, the money runs out in every single run. Typically around year eleven. If you started at sixty-five, that’s age seventy-six.
Nine percent: gone by year twelve in 99.9% of runs.
Eight percent: year fourteen, 99.7%.
Seven percent: year sixteen, 98.2%.
Six percent: year nineteen, 92.9%.
Five percent: year twenty-two, 78.0%.
Now put that against how long people actually live. A sixty-five-year-old Canadian man can expect roughly another 19.6 years, so about eighty-five. A woman, 22.2, so about eighty-seven.
Read those two lists side by side. You have to come all the way down to five percent before the money outlasts an average man, and even then it only just reaches an average woman.
The old rule of thumb was four percent, adjusted for inflation each year. More recent work puts the safe starting number nearer 3.9%, mostly because expected returns came down and lifespans went up. Neither figure is a promise. Both are starting points for a conversation.
The bit that isn’t about the withdrawal rate at all
Two retirees. Identical returns over twenty years, every number the same. Identical withdrawals.
The only difference is the order the returns arrive in.
Retiree A gets the bad years first: down eighteen, down twelve, down seven, then two decades of recovery.
Retiree B gets exactly those numbers in reverse. Good years first, the losses at the end.
A finishes with $351,711. B finishes with $1,004,141.
Same returns. Same discipline. Same everything. Nearly three times the money, decided entirely by which end of the sequence the bad years landed on.
And here’s the part that makes it clickable rather than just interesting. Stop the withdrawals and the difference disappears completely. Both sequences finish at exactly the same number, $1,535,058.
Sequence risk is created by withdrawing. It doesn’t exist while you’re saving. Which is why the years either side of retirement deserve the most caution, not the least, and why “just stay invested and ride it out” is advice that quietly stops working the day you start drawing an income.
Why a bad year costs more than it looks
There’s a second bit of arithmetic that catches people, and it’s simpler.
Lose ten percent and you need eleven percent to get back to even. Lose thirty and you need forty-three. Lose half and you need to double.
At eight percent a year, recovering from a fifty percent fall takes about nine years. At four percent, closer to eighteen.
For someone still working, those are years the portfolio spends catching up. For someone drawing income out of that same account, they’re years it spends recovering instead of paying you. That’s a different problem wearing the same clothes.
Fees, quietly
One more from the same model, and it’s the one nobody enjoys.
At a four percent withdrawal, moving from 1.5% in fees to 0.5% lifts the odds of the money lasting thirty years from 43% to 61%.
Nothing about the markets changed. Nothing about your behaviour changed. That’s eighteen points of confidence sitting in a line item most people have never actually looked up.
We’re not going to tell you low fees are the whole answer, because they aren’t, and some things worth paying for cost money. But if you’ve never seen the number in writing, it’s worth asking for it in writing.
What we’d have you do
Work out your gap before you work out your rate. Four lines.
What you need each month to live the retirement you actually want. Minus CPP and OAS. Minus any workplace pension. What’s left is the gap your own savings have to fill.
That number is what decides how the RRIF, the TFSA and the non-registered accounts get drawn down, and in what order. Not the other way round.
Most people arrive at a first meeting with a balance and want to talk about the rate. The balance is the least useful number in the conversation. The gap is the one everything else hangs off.
We’ve been doing the tax side of this since the early nineties, which matters here more than it sounds, because the order you draw from your accounts in is a tax question before it’s an investment one. Which account goes first changes your bracket, and your bracket changes your OAS two years later.
When did someone last put your gap on paper?