I’m not a gambler. I don’t play the ponies, I’ve never been to Vegas, and I don’t do ProLine. But I do know what a “trifecta” is, and trifecta seems to be the perfect word to summarize this article.
A trifecta, in horse racing terminology, is a bet in which the bettor has to correctly predict which horse will finish first, which will finish second, and which third, in that exact order. But it can also be used to describe a situation where three elements come together at the same time.
The three elements I want to discuss today are your future Canada Pension Plan (CPP) payments, your Tax-Free Savings Account (TFSA), and your Registered Retirement Savings Plan (RRSP). Those three elements will come together on or about your retirement date. My mission today is to provide you with a strategy on how to work the three together to maximum advantage.
Right now, of course, this being the season, the marketers are focused on getting people to max out their RRSP contributions, and that’s not altogether a bad thing, because sometimes people need a push to get things done. You will, no doubt, see articles with headlines like “TFSA or RRSP: Which should I do?” naturally concluding you should do both. As for your CPP contributions, they’re mandatory, so no fancy ads are needed to make you comply.
The focus of these RRSP and TFSA ads is heavily slanted towards getting the money into those accounts, rather than what you’re going to do with it when you take it out. Sure there’s the odd brochure showing a happy retired couple sailing the Caribbean on their white fiberglass yacht, sipping martinis at sundown, dreaming of their vineyard in the Napa Valley. But is that a really concrete retirement plan? Even if it is, is it your retirement goal to tool around the world on a boat, leaving the vineyard to your capable staff?
The reality for most of us is that, when retirement comes, we’re going to do pretty much the same as we do now, which is to adopt a lifestyle that is within our means. If buying a boat isn’t feasible, we won’t be doing it. If it is, then we’ll see.
So today’s mission is to focus on that end game – to come up with an exit plan that coordinates your CPP, your RRSP balance and your TFSA to maximum effect upon your retirement.
CPP rules changing
I’ll begin with the CPP, which, starting this year, is changing the rules on how much you’ll receive. Going forward, if you start taking your CPP at age 65, you’ll get the same as you did under the old rules. However, if you start taking it earlier than your 65th birthday, you’ll get 0.6% less of a pension for each month you take it early. For example, if you start collecting CPP at age 60 (or 60 months earlier than age 65), your pension entitlement will be cut by 36%, for life.
This works in reverse as well. Every month you defer collecting CPP after age 65, your pension goes up by 0.7%. If you wait until age 70, your pension goes up by 42%, for life. (Under the old rules, you would have received 30% more.) Obviously you want to start taking your CPP later rather than earlier.
Fill up your TFSA
That’s where the trifecta approach works well. The first step is to fill up your TFSA as much as you can between now and retirement, and then use those tax-free proceeds first to put off having to start collecting your CPP, while still building your RRSP. Second, start withdrawing what you need from your RRSP, but let the CPP continue to build while you pay tax on your RRSP proceeds. Third, choose an optimal time to start collecting your (now higher) CPP and blending those payments with your RRSP withdrawals in a tax-efficient manner.
As I said earlier, there’s a lot of focus on contributing to RRSPs and TFSAs, and not so much on future strategies to get the money out. The trifecta approach should help a little bit to right that balance.
Altamira delivers longer-term for RRSPs
Speaking of RRSPs, one fund you might consider adding to yours is the Altamira Income Fund (NBC 196 (NL)). As the name suggests, it’s an income fund that you can buy and hold for the long term, but right now it’s particularly appropriate given the short duration of its portfolio. In fact, it’s the long-term performance of this fund that is attractive; by contrast, its one-year return is relatively modest.
The Altamira Income Fund has been around since February 1970, has no load, is RRSP-eligible, and carries an MER of 1.07%. It ranks 128th among 277 peers, and has a first-quartile performance on a five-year basis, with second quartile for all other periods.
David West, CFA, FCSI, has more than 25 years’ experience in the financial services industry as an adviser, trainer, writer and commentator. He is a columnist for The MoneyLetter and Canadian Business Online among others, and is a regular contributor to the Fund Library.
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The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.