I'm trying to figure out why the optimizer would ever recommend spending down the TFSA if there's non-registered funds available. The only thing I can think is to avoid triggering capital gains taxes. Would there be any other reason? Does the TIME MACHINE optimizer try to optmize taxes over lifetime, does it account fo taxes at death? Most of my TIME MACHINE runs have the TFSA balance going to zero before death, which could reduce taxes during my lifetime (avoiding capital gains by spending tax-sheltered money) but leads to a big capital gains tax bill for the estate, that could be avoided.
I've put the withdrawal priority to withdraw from the Non Registered accounts first, but when I run the optimizer it wants to withdraw from the TFSA instead of the Non Registered accounts, for many years.
The Optimizer optimizes for your liquid legacy, after tax, at death. Many things can come into play, like as you say capital gains taxes within your lifespan and at death. Expected investment rates of return are also a big factor if some accounts return more than others. It works by doing the math given tax rules and your inputs for your scenario.
You can set up your scenario the way you want, the Optimizer will try to beat it and often does. If it can beat it it'll tell you something like "this scenario has been optimized and ignored your priorities". If it can't it just goes with what you ordered it to do. It always goes with the optimum for your heirs, after the unavoidable death and taxes.
Thanks for clarifying what the optimizer's objective function is. I put the maximum withdrawal for the TFSA to zero and ended up with a slightly higher liquid legacy at death (not much higher, but higher). So I don't think the optimizer scenario is actually optimized exactly. Is it a heuristic search, or an exact search? What's the search algorithm?
It is a heuristic search. To be precise, the core algorithm is exact, but heuristics are applied to deal with constraints like minimum and maximal withdrawals, spouses (CRA attribution rules, pension income splitting) etc...
In the example you provided, disallowing withdrawals from the TFSAs forces you to bail out your spouse as that money is not available to them when they run out of other sources of income. That turns out to be more slightly more optimal in the end for your case, but the algorithm finds the optimal answer with your spouse paying for their own share of expenses, more exactly following the scenario you ordered.
The algorithm is described in the blog post:
Finding the optimal withdrawal strategy in retirement to minimize taxes and to maximize your financial legacy.
The post gives references for the algorithm's origins, describes it in some detail and goes over its application and limitations. Let me know if you still have questions after reading it.
Thanks for the additional information. Changing the owner of the expenses to the person who has the more non-registered amounts helps.