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TRIGGERING TAX-EFFICIENT RETIREMENT INCOME NOT SO CUT-AND-DRIED
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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Friday, April 28, 2017




Q – I’m turning 65 this year, and I plan to retire from my full-time employment and do some part-time consulting work. My wife also plans to retire, although she’s 61. We own our home free and clear, and we have accumulated about $500,000 each in our RRSPs. My wife and I both employer pension plans that will pay out about $30,000 annually each. I also have about $50,000 in a Tax-Free Savings Account. I expect to get near the maximum Canada Pension Plan benefit, although at my income level, I’m not sure about Old Age Security. We’d like to do some planning, because we’re not quite sure where or how we should start collecting our retirement income. Do you have any suggestions? – Kevin P., Richmond Hill, Ontario

A – The big question most retirees ask is whether they’ll outlive their money. As you age, healthcare costs rise, and the question of long-term care can become a problem. Will you be able to afford to stay in your home? Will the income from your savings and pensions cover your expenses? Someone in your position needn’t worry too much. I don’t know the full particulars of your case, but at first glance, your assets can probably be layered to produce both enough income and enough growth to see you through your old age.

The rule of thumb is that in most cases, you should withdraw from your non-registered funds first and then deplete your RRSPs and TFSA. You plan to continue working part-time to bring in some income. You also have an employer pension plan. These amounts may be enough to support your retirement lifestyle for some years yet. But there’s more here than meets the eye.

Some retirees consider deferring Canada Pension Plan benefits until age 70, thus increasing the ultimate monthly CPP payment received. Likewise, some may wait to convert their RRSP into a Registered Retirement Income Fund (RRIF) or an annuity until the year they turn 69, when conversion is mandatory and minimum withdrawals are based on a formula set by the government.

In your case, though, that could put you into an even higher tax bracket down the road. If you were start withdrawing monies from your RRIF at 71 and your RRSPs were worth $500,000 each, earning 5% return indexed at 2.5%, you would each need to withdraw about $36,900 annually. If you each have annual pension income of, say, $30,000 and CPP of $13,000, you would have a gross family income of about $160,000, not an inconsiderable sum. And you’d pay some fairly serious tax on that, to say nothing of having your OAS clawed back to near zero.

So in your case, you may want to consider taking CPP benefits and converting your RRSPs to RRIFs now, so that you’ll pay less tax and perhaps salvage at least something of your OAS. Meanwhile continue contributing the maximum to your TFSA each year to provide fully tax-free growth and income down the road.

The decision on when to withdraw income and from which retirement accounts is an important one, and as you can see, it’s not as cut-and-dried as it may appear. There is no single correct “formula” or right answer. In a more complex situation where higher income streams are involved, consult a qualified financial planner to help you set priorities and create a properly layered, tax-efficient income stream. – Robyn

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

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© 2017 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
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