Retirement Income Withdrawal Strategies
In our conversations with people making the transition from their working years to retirement, many have done a great job of saving over time. They end up with many potential retirement-income sources but are unsure of how to put it all together.
As a result, retirement income planning has been compared to playing chess, where each piece has different options on how to move, and you have to coordinate all potential moves together to create a cohesive strategy.
This is often called the “retirement puzzle” as there are many potential sources of retirement income that may have to be coordinated, including:
- Canada Pension Plan (CPP) and Old Age Security (OAS),
- pension plans,
- RRSPs, S-RRSPs,
- RRIFs, LIFs
- company savings plans and stock options,
- non-registered investments,
- rental properties, and
- HOLDCOs if you owned your own business.
As an added complication, these may all be at different financial institutions, and each may have different rules, regulations, and potential start dates.
An order of withdrawal strategy means the decision on when you start to take an income from your available sources. With 6 to 12 sources of income, you can have several withdrawal strategies to review.
You will want to model the various strategies as each one will have a different effect on the taxes you have to pay today and the amount of taxes in your estate in the future.
Order of Withdrawal Strategies
In retirement people typically have two types of income that have to be taken into consideration.
Reliable Sources: this is guaranteed income from sources such as Canada Pension Plan, Old Age Security, pension plans and annuities. Each may have a different start date.
Variable Sources: this is income that is not guaranteed, and can include income from non-registered investments, RRSPs, RRIFs, and TFSAs.
When working with clients to develop a retirement income strategy there is no ‘one size fits all’, but with financial planning software, we can review the following strategies in the preliminary planning process.
- Taxable – Tax-Free – Tax-Deferred (RRSPs/RRIFS)
- You would draw an income from your reliable sources and non-registered investments first.
- The next source would be your TFSAs.
- You would delay the conversion of your registered investments (RRSPs, LIRA) to RRIFs (income) if you can.
- Tax-Deferred (RRSPs/RRIFs) – Taxable – Tax-Free
- At retirement, you would convert your Registered Investments to income plans such as RRIFs/LIFs, as well as draw on your reliable sources of income.
- The next source would be your non-registered accounts.
- The last source would be your TFSAs if needed.
- Blended Withdrawals
- You would draw an equal amount from your registered investments and non-registered investments.
- Custom – Partial RRSP Conversions
- You would start with your sources of reliable income.
- You would convert some of your registered plans to income plans, and delay some to age 71 based on the income tax bracket.
- This is a more customized approach based on tax bracket management.
You may also want to model the effect on your plans by delaying the start date of your Canada Pension Plan (CPP) .
When comparing the plans, you will be able to see the effect on your:
- potential spending over time,
- taxes (today and in the future),
- question: “Is your spending rate successful over time?”,
- and estate values of your plan.
Each year in retirement, your income plan should be updated to account for changes in your life, spending requirements, tax rates, and the investment markets.
For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®
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This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
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