Should I draw down my RRSP before taking my pension?
From time to time on this site I write about having “enough money” for us to retire on, or at least, to semi-retire on in the decades to come. Determining our “enough number” would be easy if everything in life was fixed but things are always subject to change. To paraphrase Dwight D. Eisenhower, this makes the following extremely important when it comes to financial planning: plans are worthless, but the process of planning is everything.
If you’re like me, and you’ve been planning for retirement, you’ve been making diligent contributions to your Registered Retirement Savings Plan (RRSP). In my opinion this is one of the best ways any Canadian can grow their wealth tax-deferred.
I’m also fortunate to have a defined benefit workplace pension plan. I’ve been contributing to that plan for about 16 years now.
Thanks to a reader question today, I’m going to cover the blogpost title question and share a handful of initial considerations I’ve pondered when it comes to drawing down my RRSP before taking my workplace pension. Here goes.
Consideration #1 – what income do we need?
In our financial future, assuming there is no mortgage, no more RRSP contributions, and we self-insure to the extent possible, we figure the majority of our fixed expenses in retirement will be around $4,200 per month in today’s dollars after taxes. I’m positive we can live on less but this is just an estimate. I’ve got a healthy contingency balance built into these numbers as well:
- Home and shelter needs, including taxes and utilities ($1400 per month)
- Food and personal needs, including groceries and entertainment ($1600 per month)
- Auto needs ($600 per month)
- Contingency fund, including any healthcare insurance premiums ($600 per month).
I believe one of the big decisions we need to make, related to drawing down our RRSP before taking any workplace pension, is assessing our expenses accurately and determining whether we have any choice in the matter. We might not have any choice…
Consideration #2 – what is the viability of the pension?
My workplace pension is associated with other major public sector pension plans (such as CUPE, OPSEU, ONA) although I’m not a unionized employee and never have been. Given the pension plan construction, this makes the viability of my defined benefit plan rather secure. This pension is a great form of fixed income. This is why I take on more equity risk in my personal portfolio.
Unless the unionized pension plans, as a collective, undergo sweeping changes in the coming years (anything is always possible) my vested assets are expected to payout a predictable monthly sum – the premise behind any defined benefit pension.
Consideration #3 – what might the pension income be?
Based on the calculations I’ve done recently, assuming I work with my employer until age 55 AND I take the earliest possible retirement date of age 55, the monthly pre-tax pension income will be about $2,600 per month indexed to inflation (in future dollars). Based on the expenses highlighted above, this pension will cover a good portion of our basic housing and food expenses. It will not however cover all expenses so the shortfall must be covered by our own savings.
(Of note, based on pension rules, at the time of retirement, pension legislation will require I take the 60% surviving spouse pension option. This means income for my wife is subject to change should something happen to me. A sub-set of this consideration.)
A final point about the pension income: I am nowhere near age 55. There are no guarantees I will be working with my current employer until age 55 either. Employment is never guaranteed.
Consideration #4 – what other income sources might we have?
Ever since I read David Chilton’s The Wealthy Barber it reinforced the benefits of paying yourself first. My parents were strong advocates of this for me. In my 20s the RRSP contributions were rather lean but I made up for some lost time in my 30s. Now into my mid-40s, thanks to a few decades of paying myself first, I’ve maxed out all available RRSP contribution room.
We’re optimistic if we continue to max out our RRSP contribution room, the combined value of these tax-deferred accounts could be close to $500,000 within the next decade. We could likely withdraw about $30,000 – $35,000 per year (before taxes) starting around age 55 and not fully deplete our RRSP accounts for 20-25 years; assuming the accounts grow at 6% on average per year and 2% inflation is applied to withdrawals.
My wife and I have also been huge advocates and users of the Tax Free Savings Account (TFSA) since inception. With continued contributions and maintaining our investing plan inside these accounts, we’re optimistic both accounts (combined) could be north of $200,000 in the coming five years. The income generated from that capital could be withdrawn tax-free, at an amount close to $10,000 per year for life.
Last but not least there are also government benefits in our future in the form of the Canada Pension Plan (CPP) and Old Age Security (OAS). We figure very conservatively CPP will pay us about $10,000 per year (combined) at age 60 and OAS will pay us another $10,000 per year (combined) at age 65.
Adding all this up, we are conservatively expecting to earn roughly $40,000 pre-tax from our portfolio starting around age 55 and earning another $20,000 per year (pre-tax) in our 60s without touching my workplace pension.
What is the verdict?
Given the income we need, the viability of my defined benefit pension plan, the fixed income it will deliver at age 55, and the other assets we have that should continue to grow, I have concluded we might be in a position to drawdown our RRSP assets in our 50s – therefore deferring any workplace pension income until a later date. This is by no means a final decision on this matter. Nor does this verdict include other worthy considerations, such as income from our non-registered assets; opportunities to work part-time in our 50s and 60s, and other assets held. There are no detailed tax calculations here either – just back of the napkin kinda stuff.
I hope this post provided some insight into what my good reader might want to consider for their financial situation. All your financial mileage may vary.
What are your thoughts on drawing down your RRSP? If you are already retired, what do you make of my few starting considerations above? What did you decide to do with your RRSP?