After a lifetime of saving, it can be hard to flip the switch and start dipping into the cash you've considered untouchable for decades. While you don't want to go overboard and spend too much, you're also not joining a Carthusian monastery — you want to enjoy this new phase of life.
This guide covers how to build a retirement budget, calculate safe withdrawal rates, integrate Canada Pension Plan (CPP) and Old Age Security (OAS) into your income plan, protect against inflation and market drops, and choose which accounts to tap first. Here's how to set yourself up for sustainable, responsible spending in retirement.
Start with your retirement budget
Most retirees need 70% to 80% of their pre-retirement income to maintain their lifestyle, but building a specific budget based on your actual plans is more reliable than using a rule of thumb. Before you start withdrawing money, you need to know what that money is actually for.
Start by tracking your current expenses, then adjust for retirement-specific changes:
Lower costs: Commuting, work clothes, and daily lunches.
Higher costs: Travel, hobbies, health care, and home maintenance (if you spend more time at home).
Once you have a realistic annual number, you can work backwards to figure out how much you need to draw from your savings each year.
How much can you pay yourself each year?
One widely cited starting point is the 4% rule: take out 4% of your total retirement savings in the first year, then adjust that amount for inflation annually. Add your CPP and OAS payments to that annual amount you take from savings, and you have your retirement salary to build a budget around.
Ready for some math (you can skip the next few paragraphs if not)? Here's how the 4% rule works: if you have a $1 million portfolio, you withdraw 4%, or $40,000, in your first year of retirement.
That brings your account balance down to $960,000, but since that money is invested in the markets, it still has time to grow. If you get a conservative return of 4%, your portfolio would be back up to $998,400 by the end of the year.
The following year, to account for inflation and keep your spending power equivalent to that initial $40,000, you take out $40,800 (2% more than the previous year). The year after, you take out $41,616, and so on. In a simplified illustration (actual results depend on returns, fees, taxes, and inflation), the portfolio could last roughly 30+ years.
If you pass before then, there may be savings left for your beneficiaries. As a rough illustration, reducing your initial withdrawals can increase the amount left later—how much depends on returns, fees, taxes, and how long you're retired.
Build a retirement paycheque with CPP and OAS
Your personal savings are one part of the puzzle. In Canada, we have the CPP and OAS to help form the bedrock of your income.
Think of your retirement income like a layer cake. The bottom layer is your government benefits — guaranteed, inflation-indexed, and lasting for life. Your personal savings (Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and non-registered accounts) sit on top to fill the gap between what the government provides and what your budget requires.
You can use your My Service Canada Account to estimate your monthly payments, which helps you estimate how much you may need to draw from your investments to meet your income target.
Plan for inflation and market drops
The price of bread likely won't be the same in 20 years as it is today. Inflation is the silent eroder of your purchasing power, which is why stuffing cash under a mattress (or in a low-interest savings account) can be risky over a 30-year retirement.
But markets go down, too. If you retire during a market crash and have to sell investments to pay the bills, you deplete your portfolio much faster — a concept called "sequence of returns risk."
To protect yourself, consider keeping 1 to 2 years' worth of living expenses in a high-interest savings account or cashable GIC. That way, if the market takes a dip, you can spend your cash reserves and give your investments time to recover, rather than selling at a loss.
Which accounts should you take money from first?
Although you can't avoid taxes in retirement, one way to influence your tax bill is to choose the order in which you draw from different accounts. One tax-aware approach looks like this:
First: Withdraw from your RRSP/RRIF — Take enough that, when added to CPP and OAS, you remain in a lower tax bracket.
Second: Withdraw from non-registered accounts — Use taxable savings to cover remaining income needs.
Last: Withdraw from your TFSA — Consider leaving TFSA savings for later because TFSA withdrawals are tax-free and transfers can be simpler for beneficiaries.
Many people wait too long to start withdrawing from their RRSP. When you turn 72, the government makes you convert your RRSP into a Registered Retirement Income Fund (RRIF), with minimum annual amounts you must take out that get bigger as you age — which often means higher-than-expected tax bills.
Tax rules and withdrawal strategies can be complex, so consider speaking with a qualified financial planner or tax professional about your situation.
When your RRSP must become an RRIF
This is part of how the tax system ensures RRSP savings are eventually taxed through minimum annual withdrawals. The minimum withdrawal percentages increase as you age:
Age | Minimum RRIF withdrawal |
|---|---|
| 72 | 5.40% |
| 80 | 6.82% |
| 90 | 11.92% |
| 95+ | 20.00% |
Using the $1 million portfolio example, you'd be forced to withdraw $54,000 at 72, rising to $200,000 annually once you hit 95.
What is income splitting, and when does it help?
Income splitting is when income is shared across two people with the goal of reducing their total tax burden. If one partner has substantially more retirement savings than the other, they'll be taxed more heavily in retirement.
Spousal RRSPs allow the higher-earning partner to make contributions to (but no jokes about!) the lower-earner's RRSP. To get into the details, check out this easy flowchart to help you figure out if spousal RRSPs are right for you.
What about your heirs, and where to keep their money?
If you hope to leave money to family members or other beneficiaries, it helps to think carefully about where you hold those assets and how they will be taxed. Trusts can help. But you can also get some protection through your TFSA and RRSP, assuming you set them up correctly.
If you haven't set a beneficiary for your RRSP (or RRIF, once you've converted to one), do it now. Otherwise any
remaining money is lumped in with your estate and taxed along with everything else.
RRSP/RRIF beneficiary rules:
Children as beneficiaries: Proceeds are generally taxed as ordinary income but may avoid probate (depending on your province or territory and how the account is set up).
Spouse as beneficiary: They may be able to transfer the assets to their RRSP without using contribution room, with tax deferred until the funds are later withdrawn.
TFSAs are simpler, especially if you named your spouse as a successor holder. The assets simply become theirs and keep growing tax-free.
Without a beneficiary, TFSA assets go to an heir who must move them into their own TFSA (if they have contribution room) or pay taxable gains on growth after your passing.
