RETIREMENT PLANNING

Most Canadians think retirement planning ends when they stop contributing to a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). In reality, the accumulation phase transitions into the decumulation phase, where portfolio decisions are driven by income, risk management, and longevity considerations.

A retirement portfolio mix balances three core objectives:

• Growth: Keep pace with inflation and maintain purchasing power over decades.
• Income: Generate reliable cash flow to cover living expenses.
• Stability: Reduce exposure to sudden market losses that could derail retirement plans.

In retirement, factors such as the Canada Pension Plan (CPP), Old Age Security (OAS), Registered Retirement Income Fund (RRIF) withdrawals, and taxes shape portfolio choices. Canadians also face unique risks: longevity risk (living longer than expected), inflation, and sequence-of-returns risk. By understanding the interplay of these factors, retirees can build a portfolio that provides a sustainable income stream while preserving capital.

This guide explains how to structure your retirement portfolio, manage risk, optimize withdrawals, and integrate Canadian government benefits. By the end, you’ll have a clear framework to make informed decisions for a secure retirement.

What is a Retirement Portfolio Mix?

A retirement portfolio mix is a carefully structured combination of assets designed to provide income, growth, and stability during your retirement years. Unlike the accumulation phase, when the primary goal is long-term growth, the decumulation phase focuses on preserving capital, generating reliable income, and managing risks like inflation and market volatility.

In practical terms, a retirement portfolio blends stocks, bonds, guaranteed investment certificates (GICs), dividend-paying equities, and cash equivalents to meet your investment objectives. The mix aims to balance growth potential (to keep up with inflation) with income reliability and capital preservation. Retirees cannot rely solely on market gains; they need enough liquidity to cover living expenses and unexpected costs, while still allowing the portfolio to grow modestly.

The key to constructing a retirement portfolio is understanding risk-return trade-offs. Higher equity exposure can boost long-term growth but increases short-term volatility. Conversely, bonds and GICs offer stability but lower returns. Diversifying across asset classes, sectors, and geographic regions helps reduce risk while maintaining income potential.

Your Retirement Income Floor (CPP, OAS, Pensions)

A critical first step in retirement planning is understanding your income floor, which is the portion of your retirement cash flow that is guaranteed and predictable, independent of market performance. In Canada, this primarily comes from Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), Old Age Security (OAS), and defined benefit (DB) pensions.

Having a secure income floor reduces the pressure to withdraw large sums from your retirement portfolio during market downturns, allowing you to take a more balanced approach to risk. For example, a retiree receiving CPP, OAS, and a DB pension covering 50-60% of pre-retirement income can allocate their portfolio to a mix that prioritizes capital preservation while maintaining modest growth.

Inflation indexing is another key feature. CPP and OAS benefits are adjusted annually for inflation, protecting purchasing power. Defined benefit pensions often include similar indexing, ensuring that retirees maintain real income over time. By contrast, relying solely on investment withdrawals exposes retirees to market volatility and inflation risk.

How the Canada Pension Plan Enhancement Changes Your Required Mix

The CPP enhancement, phased in between 2019 and 2025, increases both contributions and projected benefits for most Canadians. Enhanced payouts provide higher guaranteed income, which can justify a slightly higher equity allocation in personal portfolios, as retirees can afford to take modest growth risk while covering essential expenses.

Old Age Security Clawback: Design Your Withdrawals to Avoid It

OAS benefits begin to be clawed back at net incomes above approximately $90,000 in 2025. To preserve these benefits, retirees are often observed implementing tax-efficient withdrawal strategies:

• Use TFSA funds first, as withdrawals do not affect taxable income.
• Time RRSP/RRIF withdrawals to spread income evenly across years, minimizing peak taxable income.

Strategically coordinating your withdrawals with guaranteed income ensures your retirement floor remains intact, supporting both lifestyle and financial security.

Designing Your Target Retirement Portfolio Mix

Building a retirement portfolio can begin with translating financial goals into a clear asset allocation strategy. The goal is to balance income generation, capital preservation, and protection against inflation while supporting your desired lifestyle.

Core asset classes include:

• Equities: Stocks, dividend-paying shares, and equity exchange-traded funds (ETFs) provide long-term growth and income potential, helping your portfolio keep pace with inflation.
• Fixed Income: Bonds, GICs, and inflation-protected securities (e.g., real return bonds) offer stability and predictable income. They reduce portfolio volatility and provide liquidity for withdrawals.
• Cash & Cash Equivalents: Short-term savings, high-interest accounts, or money market funds serve as an emergency buffer and cover near-term spending without forcing asset sales in down markets.
• Alternatives & Real Assets: Real estate, infrastructure, or commodities can add diversification and inflation hedging, though they may be less liquid.

A thoughtfully designed mix ensures retirees can meet spending needs, withstand market swings, and preserve purchasing power. Dividend-paying equities and inflation-protected bonds are particularly useful for retirees seeking steady income that keeps up with rising costs.

Risk Tolerance vs Risk Capacity

It’s important to differentiate:

• Risk tolerance: Your emotional comfort with portfolio fluctuations.
• Risk capacity: Your financial ability to absorb losses based on income, savings, and guaranteed benefits.

Example: Two retirees may both dislike market volatility, but someone with a large guaranteed pension has higher risk capacity and could sustain more equities, while another relying solely on RRIF withdrawals might need a conservative allocation.

Glide Paths in Retirement: “To” vs “Through”

Glide Paths Explained

A glide path is a strategic plan for how your portfolio’s asset allocation changes over time.

“To Retirement” Glide Path

• Designed for the accumulation phase leading up to retirement.
• Gradually reduces equity exposure as the target retirement date approaches.
• Goal is to protect capital while still capturing growth opportunities before income withdrawals begin.

“Through Retirement” Glide Path

• Extends beyond the retirement date into the decumulation phase.
• Maintains a moderate equity allocation early in retirement to support portfolio growth.
• Balances income needs with long-term sustainability, considering longevity and inflation.

Target-Date Funds often adopt either philosophy, automatically adjusting your asset mix based on the chosen approach.

Benefits of Continued Equity Exposure

• Helps protect against inflation and maintain portfolio longevity.
• Reduces sequence-of-returns risk by allowing growth to offset early withdrawals.

Transitioning Portfolios

• Move from accumulation portfolios (heavier in equities) to drawdown-focused portfolios with bonds, cash, and income-generating investments.
• Gradual adjustments help smooth market volatility and ensure sustainable withdrawals.

Common Considerations

• Retirement funds are frequently structured around either a “to” or “through” retirement philosophy based on risk tolerance.
• Investors commonly perform periodic reviews of their asset allocations to ensure they match their income needs and market conditions.
• A “through retirement” glide path is preferred for long retirements, preserving capital while still benefiting from market growth.

Sequence-of-Returns: Why the First Five Years Matter

Understanding Sequence-of-Returns Risk

Sequence-of-returns risk refers to the danger that negative market returns early in retirement can disproportionately reduce the longevity of your portfolio. Even if the long-term average return is positive, early losses combined with regular withdrawals can deplete your capital faster than if those same losses occur later in retirement.

Example

Consider two retirees, each starting with $500,000 and withdrawing 4% annually:

• Retiree A: Experiences market losses in the first five years. Withdrawals during this downturn reduce the portfolio base, potentially causing it to fall below sustainable levels.
• Retiree B: Experiences losses later in retirement. Withdrawals happen from a larger, healthier portfolio, allowing the portfolio to sustain income needs longer.

This example shows that the order of returns matters as much as the average return over time.

Mitigation Tactics

• Bucket Strategy: Divide assets into short-, medium-, and long-term buckets to avoid selling investments at depressed values.
• Flexible Withdrawals: Adjust annual withdrawals according to market performance to preserve capital.
• Annuities: Introduce guaranteed income to offset market risk and stabilize cash flow.
• Diversification: Use a mix of equities, bonds, and income-generating investments to reduce volatility and sequence exposure.

Account Types & 2025 Limits

RRSP to RRIF Transition

Registered Retirement Savings Plans (RRSPs) must be converted to a Registered Retirement Income Fund (RRIF) by December 31 of the year you turn 71. RRIFs require minimum annual withdrawals, which are fully taxable as income. Planning withdrawals strategically can help manage taxable income and avoid OAS clawback.

TFSA 2025 Contribution Limit

The Tax-Free Savings Account (TFSA) annual contribution limit for 2025 is $7,000, with any unused room carrying forward indefinitely. Withdrawals are tax-free, and withdrawn amounts can be recontributed the following year. TFSAs are ideal for growth and income investments, including ETFs, stocks, and guaranteed investment certificates (GICs), benefiting from tax-free compounding.

Non-Registered Accounts

Non-registered or taxable accounts have no contribution limits, but capital gains, interest, and dividends are taxable. These accounts can supplement income once RRSP and TFSA room is maximized.

Practical Tips

• Account Sequencing: A common strategy involves maximizing TFSA contributions first when spare cash flow is available, followed by RRSP contributions to utilize tax deductions.
• Rebalancing Between Accounts: Rebalancing directly between non-registered accounts may trigger taxes. TFSA and RRSP allow reallocation inside the account without immediate tax consequences.

Three Sample Asset Allocation Models You Can Adapt

Note: These are for illustrative purposes only. Please consult with a financial specialist for guidance.

Sample Portfolio Mixes & Asset Allocation

Conservative Portfolio

• Allocation: 40% equities/55% bonds/5% cash
• Equities: Canadian dividend ETFs and global equity ETFs for modest growth
• Bonds: Government and corporate bonds, either individual or bond ETFs
• Cash: Maintains liquidity for emergencies and near-term withdrawals
• Goal: Preserve capital while generating modest returns; suitable for retirees or low-risk investors

Balanced Portfolio

• Allocation: 60% equities/35% bonds/5% cash
• Equities: Blend of Canadian and international ETFs for growth and diversification
• Bonds: Mix of fixed-income funds providing stability
• Cash: Covers withdrawals in the short term
• Goal: Moderate growth while managing volatility; ideal for pre-retirement or early retirees

Growth Portfolio

• Allocation: 75% equities/20% bonds/5% cash
• Equities: Heavier weighting in global and emerging market ETFs, with potential small-cap exposure
• Bonds: Limited exposure to reduce overall risk
• Cash: Small buffer for withdrawals
• Goal: Long-term growth; suited for younger investors or retirees with higher risk tolerance and a long horizon

Rebalancing & Income Draw Techniques

• A common practice involves rebalancing portfolios annually or semi-annually to maintain target allocations
• Many strategies prioritize drawing income from bonds or cash first, equities later, to preserve growth potential
• Investors frequently use dividend ETFs or systematic withdrawals for predictable cash flow

Withdrawal Order, Taxes, and Rebalancing

Withdrawal Order

• A common strategy is to withdraw from accounts in this sequence: taxable accounts first → RRSP/RRIF → TFSA last.
• Taxable accounts provide flexibility because only realized gains and dividends are taxed, allowing partial withdrawals without affecting tax-deferred growth.
• RRSP/RRIF withdrawals are fully taxable as income, impacting marginal tax rates and possibly OAS benefits.
• TFSA withdrawals are tax-free, so delaying these preserves their growth potential for later years.

Withholding Tax & Reporting

• RRIF withdrawals are subject to withholding tax, reported via T4RIF slips.
• Non-registered accounts incur capital gains or dividend taxes in the year gains are realized.
• Careful sequencing and planning can reduce the likelihood of unexpected tax bills at year-end.

OAS Clawback Management

• Taxable income above approximately $90,000 can reduce or eliminate OAS payments.
• Staggering RRSP/RRIF withdrawals or using TFSA funds strategically helps manage income levels and avoid clawback.

Rebalancing During Drawdown

• Retirement doesn’t mean rebalancing stops. Maintaining your target allocation is crucial for managing risk and ensuring income longevity.
• Using scheduled withdrawals or new portfolio contributions to restore balance before selling appreciated assets.
• Consistent rebalancing aligns your portfolio with your remaining time horizon, risk tolerance, and income needs, helping preserve capital while generating reliable retirement cash flow.

Key Takeaways: Building Your Retirement Portfolio Checklist

Determine Your Risk Profile and Income Floor

• Assess your comfort with investment risk versus your financial capacity to bear losses.
• Identify guaranteed income sources such as CPP, OAS, and defined benefit pensions, which form your retirement “income floor.”
• Understanding your risk tolerance and income floor helps guide asset allocation and withdrawal strategies.

Set Your Target Asset Mix and Automate Contributions

• Choose an appropriate portfolio mix based on risk, time horizon, and income needs (e.g., conservative, balanced, or growth).
• Automate contributions to RRSPs, TFSAs, or non-registered accounts to maintain discipline and take advantage of dollar-cost averaging.
• Consider scheduling withdrawals strategically to optimize taxes and OAS/CPP benefits.

Review and Rebalance Your Asset Allocation Regularly

• Conduct at least annual portfolio reviews to ensure allocations align with evolving goals, risk tolerance, and market conditions.
• Rebalance as needed to maintain your target mix and reduce unintended risk exposure.

Tip: Keep a written record of your target mix, withdrawal plan, and account details for easy reference during reviews.

Choose the Best Asset Allocation for Retirement Based on Your Financial Goals

Building a retirement portfolio mix is about more than picking stocks and bonds; it’s about designing a strategy that balances income, growth, and stability while protecting against key risks like inflation, market volatility, and longevity. By understanding your guaranteed income sources, such as CPP, OAS, and any defined benefit pensions, you can establish a reliable income floor. This foundation allows you to take calculated investment risks with the remainder of your portfolio, ensuring long-term sustainability.

A thoughtfully designed target mix considers your risk tolerance, risk capacity, time horizon, and income needs. Glide paths, whether “to” or “through” retirement, help manage the shift from accumulation to decumulation, while sequence-of-returns risk emphasizes the importance of protecting your portfolio during the first years of retirement. Using strategies like bucket planning, gradual withdrawals, and maintaining diversified assets can reduce the impact of early market volatility and provide stable cash flow.

Tax planning and account sequencing are equally important. Coordinating withdrawals from non-registered accounts, RRSPs/RRIFs, and TFSAs can minimize taxes and prevent OAS clawback, helping your portfolio last longer. Rebalancing and periodic portfolio reviews ensure your allocation remains aligned with evolving market conditions and personal circumstances.

Ultimately, a retirement portfolio mix is not static; it evolves as your needs, income sources, and market conditions change. By combining education, strategic planning, and professional guidance, Canadians can approach retirement with confidence, knowing their investments are structured to provide income, preserve capital, and keep pace with inflation. Start by assessing your income floor, defining your target mix, and planning withdrawals carefully. Then monitor and adjust over time to ensure a sustainable, comfortable retirement.