Preserving your retirement income
Live the life you've earned.
Now that you're retired (or just about to), you’ll need to manage your investments, income and expenses more closely than ever. These days, retirement is often longer, more active and as a result, more expensive. Here’s what you need to do to make sure you enjoy it.
If you haven't already, you'll need to draw up a retirement living plan. The overall objective is to preserve your assets while ensuring you have enough income to support your lifestyle. First off, you'll need to determine:
- The value of your existing RRSPs, non-registered investments and real estate
- Your annual expenses depending on your lifestyle
- How much you'll receive from government pensions (CPP, OAS)
- The value of any corporate pensions
Developing your plan is where the relationship with your advisor and financial planning team can be used to your fullest advantage. Based on a thorough understanding of your situation and goals, they can help you:
- Decide on the ideal investment portfolio to meet your goals. This could include annuities, RRIF, TFSAs, etc.
- Minimize your tax hit by designing the right mix of assets, combined with other strategies like income splitting.
- Understand the potential impact of RRIF withdrawals on your eligibility for government programs such Old Age Security payments or age credits.
- Determine how to layer your income to meet changing needs.
- Establish an estate plan or review the one you have.
- Evaluate your life and health insurance† needs.
Structuring your retirement income is a unique process for everyone. It isn’t a simple calculation. In fact, it can be very complicated with a number of different implications based on your asset allocation and investment strategy. Another reason why expert professional advice is so important.
RRSP conversion. Really big decision.
The latest you can close out and de-register your RRSP is by the end of the year you turn 71. There are four options available to convert your tax-sheltered savings into taxable retirement income:
1. Cash out – take the money and pay the tax.
If you have little or no income in the year you convert and your RRSP is small, it may make sense to take some or all of the money out in cash, pay the tax and put the remainder in an RRIF.
2. Open a Registered Retirement Income Fund (RRIF) – flexibility and control.
Unlike RRSPs, which are designed for saving, this is a plan designed for spending. Or more accurately, funding your retirement. You can't add to these funds, you can only withdraw. You do have the flexibility to choose the investments you hold, how much income you want and how frequently you receive it. You can have as many RRIFs as you like and transfer funds between them. There is a minimum you must withdraw annually and any amount withdrawn may be subject to withholding tax. RRIFs are a good option if you have other assets you can draw from and would like to control your investments, such as Canadian stocks, bonds and mutual funds*.
3. Purchase an annuity – limited funds, guaranteed payments.
This option may appeal if you want to preserve capital and not worry about managing a portfolio. An annuity provides a specific level of income or payment to you every month. If you feel you might live a longer life, this guarantees a steady income flow as long as you need it – for life or for the time period you specify. The downside is loss of flexibility and access to your capital – it's locked in. There are several types to choose from (Life, Term Certain and Prescribed) with very specific features, so be sure to consult your financial advisor to select the one that works best for you.
4. Do both – hedge your bets.
Splitting your capital between a RRIF and an annuity can provide a balanced mix of guaranteed income and capital growth potential. Another option is to start with a RRIF and convert to an annuity later. This can work to your benefit; the older you are when the annuity begins, the higher the income amount.
Make the most of what you've made outside your RRSP.
Once your registered income portfolio is allocated, you might still have other non-registered investments. One efficient and convenient way to draw from that portfolio is a systematic withdrawal plan (SWP). It automatically withdraws a predetermined amount or percentage from that portfolio.
Each payment you receive is a mix of interest, dividends and capital gains and receives a special tax treatment – Canadian dividends benefit from the dividend tax credit while capital gains are taxed at only 50% of their value. Some types of mutual funds*, called 'T-series' funds (T-SWP) are designed to be extremely tax-efficient. Ask your advisor for more information.
Your health is a valuable asset, too.
More and more Canadian retirees are continuing to work on a part-time or consultative basis. While certainly helping to stretch out your investments, it's important to keep in mind you might not work as long as you think. A recent survey found that 21% of retirees encountered a health condition that required them to stop working earlier than expected.
Should you be planning to continue to work, it would be wise to develop a back-up plan if you were forced to stop. Options include using segregated funds funds or long-term care insurance to protect both your assets and lifestyle.