Even those who despise golf will likely have heard the saying, “driver for show, putter for dough.” The premise: that smacking the ball 300 yards looks great but the ability to get it in the hole is what determines success. It’s a perspective not dissimilar to retirement planning in that saving, or wealth accumulation, gets you so far but planning your income and spending, achieves the retirement you want.
Just like putting, it’s often the most neglected discipline, and where an advisor can really make a difference. What does the retirement of your dreams look like? That is always the starting point. Whether it’s dream vacations, helping grandkids get on the property ladder or having a second home overseas, strategic retirement income can unlock this lifestyle for you.
Here's a look at four critical areas that can help you plan with your advisor.
1. CPP and when to take it?
Generally speaking, the longer the life expectancy, the more reason to defer CPP past 65, which you can do up to 70 years old. The earliest you can take it is 60 but that could mean you receive up to 36% lower benefits, although you’ll receive them over a longer period of time. By contrast, for every month past 65 you defer, your benefits increase by 0.7% and, if deferred a full five years, will result in a 42% higher payment.
Taking it early may be the right choice if you have cash income needs or if taking it later will push you over tax brackets or the OAS recovery tax thresholds. If you don’t need money to cover expenses, there may be an opportunity to put your money to work. A factor worth considering is the break-even point – the age at which you are no better off for having taken the advanced income. Taking CPP early and investing can push back this breakeven point. But bear in mind the guaranteed extra return you collect simply by deferring is not always easy to match in an investment portfolio.
2. Sharing the wealth
Depending on the length of your marriage, it is possible to share a portion of your CPP benefits with your spouse. This is beneficial if one spouse is in a higher tax bracket, as the money shifted to the lower-earning spouse will, of course, be taxed at a lower rate.
Separate from CPP, income-splitting is a strategy that all Canadians with spouses/common-law partners should consider. Residents can allocate a maximum of 50% of their eligible pension income to that spouse. Eligible pension income for those 65 and older includes a lifetime annuity payment, registered retirement income funds (RRIF), or registered retirement savings plan (RRSP). CPP, OAS and foreign pension are not eligible.
Another method of shifting money from the high-income spouse to the lower is a spousal RRSP. For example, Canadians over the age of 71 are no longer eligible to contribute to their own RRSP but they can contribute on behalf of a spouse under the age of 71, as long as that person has RRSP room available.
And that’s not where income splitting ends. Moving money into a family trust can shift investment income into the hands of lower-tax-rate family members, often your children. This is a great way to generate extra income for travel plans, a downpayment for a home or help fund the education needs of your children.
3. Using your RRIF
All good things come to an end and after the year you turn 71, Canadians can no longer own an RRSP. This means it’s time to convert your savings into a registered retirement income fund (RRIF), which requires you to make mandatory minimal withdrawals every year, which are taxable. However, the money in your RRIF can continue to grow on a tax-free basis.
If you need the minimum withdrawals, or more, to meet expenses, that’s fine but if you don’t, there are ways to lower taxation. One way is to base the minimum payments on the age of the younger spouse, simultaneously reducing the payments and lowering taxes. Another option is to invest in a non-registered account where tax-efficient dividends and capital gains can be realized. Or, you can invest in a TFSA, providing you have contribution room.
RRSPs get all the headlines when it comes to retirement savings but when it comes to your income plan, TFSAs are integral and a great place to direct excess cash. Contributions can be made as early as 18 years old, withdrawals are not taxed, and they earn tax-free growth. Put it this way, if you need additional income for a renovation or holiday in retirement, increasing RRIF withdrawals could hand you a higher tax bill and exposure to OAS recovery tax. Withdrawing from a TFSA has none of these implications.
4. Strategic withdrawals
It’s likely that having reached retirement your financial assets will include money accumulated in RRSPs/RRIFs, TFSAs and non-registered accounts. Of course, there are other potential sources of income like rental properties and real estate, inheritance, and businesses. The tricky task for the retirement years is when to unlock these assets in the most tax-efficient way and still meet cash flow needs (i.e. maintain the desired standard of living).
Every case is different, but a common strategy is layering income, which generally uses income that is the least flexible and tax efficient first, like RRIF minimum withdrawals, additional RRSP income, OAS and employer-sponsored pension income. This can form the base of your income. For additional income needs, personal savings/assets, TFSAs, non-registered investments, and non-taxable receipts come more into play.
As income increases, generally so does the amount attributable to tax. By layering more tax-efficient sources of income as income rises, this keeps taxation to a minimum. Working with an advisor, this should be reviewed at least annually as your life changes.
Remember, accumulation for show, decumulation for dough! It may not be talked about as much as methods of saving but how you structure your spending in retirement can make your retirement dreams a reality.
