How to generate retirement income
You could argue beyond the how much do I need to retire question, this need comes up next: how to generate retirement income.
I mean, we all want to know how best to use our retirement incomes sources wisely. Those retirement incomes sources are necessary to help fulfill income needs, while being tax efficient; income to provide some luxuries now and them, or to potentially deliver generational wealth should that be your goal.
My retirement income plan and options
I’ve been thinking about my income plan, or at least my semi-retirement income plan, for some time now.
I captured a list of overlooked retirement income planning considerations here.
Yet I can appreciate not everyone writes about nor thinks about this stuff.
There are obvious ways to generate retirement income but I suspect some might not appeal to you for a few reasons!
Option #1 – Save more
I doubt most people will like this option but it’s probably necessary for many Canadians: you’re going to need to save more than you think to fund your retirement. This is especially true if you have no workplace pension of any kind to rely on and/or you haven’t assessed your spending needs. More money saved will help combat inflationary pressure, rising healthcare costs and longevity risk. Which brings me to option #2.
Option #2 – Work longer
If you didn’t like option #1, you might not like this one! Working longer into your 60s or potentially to your 70s might be the reality for a good percentage of Gen X and Y. Part of the reasons these cohorts will need to work longer is because many Boomers remain in the workforce so they can fund their retirement. Some Boomers are continuing to work because they enjoy it. Some are continuing to work because they absolutely have to.
Option #3 – Spend less
The 4% rule remains a decent rule of thumb – it tells us we should be “safe” to withdraw approximately 4% of our portfolio with a minimal chance of running out of money.
Using 4%, a retiree would need $1-million invested to produce a steady income of $40,000 a year. Spending less, will absolutely help portfolio longevity and give stocks in your portfolio a longer time frame to run.
Our initial retirement income plan has us leveraging a mix of income streams in semi-retirement:
- Part-time work – to remain mentally engaged – in our 50s.
- Taxable but tax-efficient dividend income.
- Strategic RRSP withdrawals.
I’m not quite “there” yet in terms of other incomes streams, including TFSA withdrawals and exactly when to take those, but I’m working through that.
Generating retirement income
When it comes to you, options abound. You might have similar income streams or other ideas altogether. Remember, personal finance is personal.
I’ve had the pleasure of working with a few advice-only planners on this site and I’m happy to bring back Steve Bridge, a CFP from Vancouver for his detailed thoughts on this subject. Steve works as an advice-only financial planner with Money Coaches Canada (no affiliation with My Own Advisor). You can find him on that site for his services and you can follow him often on Twitter like I do at @SteveMoneyCoach.
Steve, welcome back to chat about this important subject!
Always a pleasure Mark. I love what you do here and I follow your journey.
Steve, you work with a lot of clients on this very subject. Typically speaking, most aspiring retirees already know the merits of using their RRSP and TFSA for wealth-building. However, what other income sources should folks consider?
Mark, there are quite a few different potential sources of retirement income and, like all things in personal finance, they vary widely from person to person.
Being in Ottawa, you might know quite a few people who work for the federal government and have defined benefit (DB) pension plans (these are growing increasingly rare in the private sector). Teachers, police, and other occupations may also have a DB plan. This can be a large source of retirement income, and in some cases, may be all you need! These pensions pay a set amount each month after retirement (the amount is based on a formula) for the rest of your life, or for a guaranteed number of years depending on which option you chose.
Mark, you shared some insights on pension plans in this post so I won’t get into all the details with your readers today. We can save any detailed discussions on pensions for a future post together.
Another common source of retirement income is a Locked-In Retirement Account (LIRA, also sometimes called a locked-in RRSP). A LIRA is a registered pension plan from a former employer that must be converted to a Life Income Fund (LIF), before the money can be withdrawn. LIF accounts have both minimum and maximum percentages (based on age and province) that can be taken out each month/year. In many cases it is advantageous to withdraw the maximum each year as it can take a long time to completely empty these accounts (plus, the entire amount remaining in the account is taxable as income at the last spouse’s passing). Alberta allows a 50% unlocking and subsequent transfer to an RRSP or RRIF, while BC does not. In Ontario, 50% can be unlocked as long as the funds are in a Schedule 1.1 life income fund (LIF).
Again Mark, you covered the topic of LIRAs and how you’ve invested in your LIRA here.
There are a few more key retirement income sources we should mention. As of February 2021, the maximum amount someone can receive at age 65 from the Canada Pension Plan (CPP) is $1,204 per month. This payment is based on how much you (and your employer) contributed to the plan during your working years and the average Canadian receives around half of the maximum, or about $600 per month ($7,200 per year).
Most of your readers probably already know that CPP can be taken as early as 60 and as late as 70 (see below for more). I know you’ve touched on this subject a few times – including this case study.
Another source of retirement income is Old Age Security (OAS). This is based on residency, so that anyone who has lived in Canada for 40 years or more from ages 18 to 65 will receive the maximum OAS of $615 per month ($7,380 per year) – current to the time of this post. Anyone who has lived in Canada for at least 10 years during that timeframe will receive a percentage of the maximum (e.g., 10 years = ¼ of the maximum).
Finally, another key income source for folks is income from a rental property. Retirees might also have income from the sale of corporation, drawing from a corporation and an inheritance.
Definitely a lot of moving parts for some people Steve! So, given many Canadians are increasingly striving to retire without the aid of a workplace pension, what advice do you typically have for clients? Is there a self-assessment exercise / budgeting exercise you would ask folks to consider??
Critical questions Mark.
One of the most important exercises anyone can go through is to figure out how much they might want to spend in retirement. As George Foreman said, “The question is not at what age I want to retire, it’s at what income.”
Figuring out how much you think you will spend in retirement is worth putting some time into. Consider:
- Fixed monthly costs (e.g., cell phones, internet, car insurance)
- Variable monthly costs (groceries, gas, eating out, etc.)
- Annual costs (property tax, car insurance, memberships, accounting fees, etc.)
- Random monthly/annual costs (clothes, gifts, travel)
- Costs that happen every few years (home furnishing, appliances, home repairs, maintenance, renovations, car replacement, etc.).
Including future expenses, or expenses that come up once in a while is important, as it will avoid being caught unprepared. For example, $50,000 in home repairs/renovations/upgrades, etc. that are done every five years would mean including $10,000 per year for these expenses ($50,000 per year divided by 5 years = $10,000)
Once you know your approximate retirement spending goal and your sources of retirement income, you are in a good position to determine whether you are on track or not. Is there a gap? If there is, what do you need to do to close that gap? Could you save more? Spend less? Work longer? Lower your retirement spending goal? Take more investment risk?
Having a long-term plan sounds critical Steve and I know we’ve discussed the elements of a comprehensive financial plan previously that thousands of my readers have appreciated.
Given the common sources of income, and budget self-exercises above Steve – what key factors should go into taking CPP now or OAS now, meaning as early as possible?
More bar room fights have been started on the topic of when to take CPP and OAS than anything else in this country. This decision depends on your specific situation, but for many (perhaps most) people, delaying these until age 70 will give them more money in the long run.
Reasons to take CPP before age 65 may include:
- If you really need the money to live off
- You have a shortened life expectancy
- You are collecting a survivor CPP
- You had a lot of drop-out or years of not contributing and are retiring early.
Your CPP article above was fantastic and touched on very important points.
Thanks for that.
Steve, what experiences do you have with clients who’d rather “take the money and run” early (with CPP and OAS) given they are bird-in-hand people? It seems there are a number of emotional decisions beyond math decisions when it comes to taking CPP and OAS early.
When it comes to financial planning, I tell my clients that there is a financial answer and a behavioural/emotional answer; deciding when to take CPP and OAS falls squarely into that category. I prepare the numbers, we’ll have a good conversation around the pros and cons, and in the end my clients get to make the final choice – the way it must be.
It’s kind of like going to the doctor and hearing advice you might not like, but that is actually in your best interest.
People should absolutely do the math and if they are unsure of when they should take CPP or have a complicated situation, then hiring someone like Doug Runchey (in your CPP article) to do the calculations for them is an excellent investment.
Some conventional financial planning wisdom has mentioned in a number of articles to keep RRSP money “until the end” – re: do not withdraw from the RRSP until you are forced to. This conventional wisdom seems flawed to me. What are your thoughts on withdrawing money from your RRSP “early”?
This is a case where it is quite often in your favour to go firmly against conventional wisdom. I come across this thought/recommendation quite often and the reasons given (often by another financial professional) raise my blood pressure.
There are a few big advantages to drawing down RRSP/RRIFs before ’the end’ (age 71/72, when it becomes mandatory).
- You can save yourself a lot of tax in your lower (or no!) income years. The ideal situation is to start drawing down any RRSP assets before you start to take CPP and OAS. Once you add in OAS and CPP (no matter when you choose to take those benefits), along with other retirement income sources, you will likely be paying more tax. Why not get RRSP/RRIF money out early when you are in a lower tax bracket and pay less tax? Even if you don’t need the income, get the money out from your RRSP/RRIF accounts and put that money into a TFSA or non-registered investment account. These early retirement /low-income years are also a good time to be removing money from LIF accounts.
- Any money left in these accounts at your passing will be taxable as income to your estate. Forget probate, this is a much bigger threat to your wealth. If someone has $1,000,000 in their RRSP/RRIF, waits until age 72 to start drawing from it and passes at age 73, they will lose almost half of their money to tax. If they have drawn as much as reasonable as early as possible, the final tax bill is much less. Yes, RRSPs/RRIFs rollover tax-free to your spouse when you pass– I am referring here to when the last spouse passes away, or when a single person dies. It can be a major estate cost.
- Those of us without a defined benefit (DB) pension or LIF can get the pension tax credit. If you convert part or all of your RRSP to a RRIF at age 65, the first $2,000 of withdrawals will qualify for the pension credit. Folks with a DB plan or LIF will already be getting this credit and can’t ‘double-dip’.
- Also, for those without a DB pension or a LIF, RRIF income can be used for income-splitting once you hit age 65. This can lower your income tax payable if you have a spouse/common-law partner.
One of the best things people can do is come up with a strategic drawdown strategy that looks at all retirement income sources.
(Mark – I considered that here when it comes to my RRSP – I will likely draw down my RRSP in my 50s and 60s.)
You can then determine when to take money from RRSP/RRIF accounts and how much to take each year. For this kind of help, I recommend working with an advice-only financial planner who doesn’t sell products. (I may be a little biased here but it’s true!)
Steve, I recognize you don’t want to be in the specific product advice business but I wanted to ask: what are your personal thoughts on total return / all-in-one ETFs to simply draw down over time?
These products seem great for asset accumulation in particular and can help retirees simplify the draw down plan as well, although there is some strategy involved there.
I wrote about some of my favourite all-in-one ETFs here.
I recall MoneySense recently had a take on Vanguard’s retirement income fund: VRIF and its 4% payout.
I am a personal big fan of all-in-one-ETFs. Globally diversified, low-cost, and automatically rebalancing – what’s not to love?! I think drawing from these along with a cash/GIC wedge is a solid strategy – you just have to watch the asset allocation, so you don’t get hit with sequence of returns risk at the wrong time.
You wrote about your plans to have a cash wedge here which I think is a great start in the right direction.
My personal situation is a bit unique. I have no company pension and my CPP will be limited (I spent quite a few years working/travelling overseas), so I am relying solely on my personal savings and investments.
At this point, I have most of my money in a globally diversified portfolio of index exchange-traded funds (ETFs), as well as some Dividend Reinvestment Plan (DRIP) stocks.
My rough plan at this point for retirement is to sell off some ETFs and DRIP stocks as I go, and also have a decent cash/GIC wedge in case markets go south for a couple of years. The cash wedge would allow me to sleep soundly knowing I could see my way through a short to medium-length correction. I’ll probably do some part-time work as well, which could be adjusted up and down as necessary.
Even a fee-only planner has to have a plan Steve! Finally, what’s the #1 piece of advice you can offer for folks trying to figure out how much they will need in retirement? Seems everyone wants to know their retirement number….
Your retirement spending number is a really important number to come up with, so I would say put some time into it. Sit down (with their partner if they have one) and start with your current monthly/annual expenses. Then think about or discuss how you see spending your time in retirement and what might be different from your current life. Leave it for a few days, come back to it and then review it again. Repeat as needed.
I would avoid the shortcut rule of thumb that says you will need 70% of your pre-retirement income once you stop working. I have had clients who need just 33% of their pre-retirement income, and others who expect to ‘need’ 125%!
Knowing your target retirement spending is the basis for a proper financial/retirement plan.
Simple yet effective Steve. Thanks so much.
We covered A LOT of material today but that was the goal. I wanted to share my own insights and those from an advice-only planner that sees these concerns and questions every single day.
I have no doubt I’ll be writing more about my own retirement income dreams and plans over time, so do stay tuned for future articles.
For additional reading on the 4% rule, retirement, income in retirement and more check out these links. I look forward to your comments as always.
More reading and links:
How to draw down your portfolio using Variable Percentage Withdrawal (VPW).
The proven path to retirement using the 4% rule.
Does the 4% rule make any sense?
Check out my dedicated Retirement page to learn from successful retirees.
Visit Cashflows & Portfolios for any cashflow tools and support to run any of your retirement income projections.
First time poster, long time reader here. Nice article and as usual you have left me with things I need to consider.
Off topic: Like most everyone, I am mindful of any fees while accumulating a nest egg. What I have not found anywhere is something which outlines the different fees in our withdrawal phase, comparing accounts with different institutions. Or any nuggets of info how any transfer out fees can be reduced or waived.
Is this info available online anywhere?
Thanks very much Douglas for your follow and readership!
Humm, interesting. Let me see if I can tackle that over time. Quickly though:
1. Taxable if you have investments there – the sale of the transaction and any capital gains. Fees are usually $10 or less for any sales of stocks or ETFs. You can buy ETFs commission-free via my affiliate link re: Questrade 🙂 I’ve also got some huge cash back deals with BMO too!
2. TFSA – same, fees to sell and no capital gains to worry about. Again, most brokerages are $10 or less per transaction do try and do that infrequently.
3. RRSP – some institutions charge $25 or so to transfer out. RRIF withdrawals/income streams are usually free 🙂
Is that helpful or are you looking at a detail brokerage by brokerage post? I will cover that eventually on the site….on my to-do list!
Thanks for the reply. I should have been more concise. I mean along the lines of partial/full deregistration/withdrawal fees in registered accounts.
Looking at TDW vs QT as an example:
QT full deregistration fee $100
partial deregistration $50
TDW full deregistration fee $150
partial deregistration fee $25
** If they throw any perks dependent on other factors I don’t know.
As I approach the decumulation life, this very limited comparison leaves me re-thinking my withdrawal plan.
Lots of talk about fees matter on the way in but not much talk in fee planning on the way out. Or institution comparison.
Anyway, keep up the great work, much appreciated.
I can’t speak for other brokers but RBCDI has no RRSP withdrawal fees assuming you have more than 250k in assets (qualify for Royal Circle).
Ah, gotcha. Likely something to post about in the future. I would need to do a search myself and ask their teams but many brokerages as you have indicated do charge for RRSP withdrawals, partial or full. You could also ask to have them waived as well. I’ve had the good fortune of having some bank fees “back in the day” waived because I asked. 🙂
I recall BMO RRSP partial withdrawal fees might still be $25 as are TD.
I can add to my list!
Not much to add here to the rest of the comments other than thanks for another enjoyable and informative post. I will most likely contact a fee only advisor around 58 to dial in my CPP and OAS plan. I also might consider using the hardship low income clause to pull from my very small LIRA prior to 55, that being said it is small and I could easily draw it down at that time. Then of course also the GIC hack that Ed Remple described on his blog that I read recently.
Good thinking, Chris. If you have health concerns (shorter life expectancy) or don’t have other income sources, taking CPP early might be best. If you have other sources (RRSP, LIRA/LIF), taking those first will allow you to get more CPP/OAS. If you’re like me, it will create your own defined benefit (DB) pension plan.
Nothing wrong with taking CPP early or late or anywhere in between. I just think it needs to be an informed decision. They could certainly simplify the contribution rules so you don’t need an accountant or financial whiz to figure things out. That’s just me though. Simplicity is good for all.
Yes, do you mean GIS hack though? I didn’t see that article.
Good catch on my typo…yes GIS
The article is eye opening and easy for me to do if the wife and I choose. We will have enough TFSA to use as non taxable income during the setup years for GIS. We also dont have pensions so this is perfect. Pretty cool retirement tactic IMO
Yes, essentially you can get a few years of tax-free money this way. I might consider the same but at the same time I feel its a loophole. That said, it is perfectly legit!! Even without a pension, as long as you have no taxable income I recall you can apply for GIS. re: under $18K per year or something like that.
I know there has been a discussion about this on here several years ago. Some of us agreed the system needs a serious overhaul re OAS/claw backs, GIS, TFSA as income source, etc.
This tactic is not possible here due to wife’s work pension that started 9 years ago. Its also just not something I could live with due to such low income levels. And for me its gaming the system. Not something this guy has ever done or plans to do. Other people have different situations and ideals. That’s fine.
That’s the thing, it’s legit but it seems like it is trying scam the system. I dunno, doesn’t feel right applying for GIS if you don’t need it. The system does need to change. I hope to write about such subjects in more detail over time.
It’s there and available for those it works for. In some cases it’s crucial and really needed. In others it’s a way to use taxpayer money to boost your retirement instead of what you can do with only your own funds. IMHO the program was designed just for the former but the rules don’t support that, so perhaps not.
Will be interesting to read more on your site. Our country seems to be moving increasingly towards more social handouts. The cost to some is high and will be higher.
Yes, it will….higher and higher with time.
I’m with you, Mark.
“And for me its gaming the system. Not something this guy has ever done or plans to do.”
Yup, wasn’t raised that way myself. I suppose one could also stop in at the food bank or a day shelter for a free meal every day as well?
I have stopped in before, but to give not receive. Thankfully. I know you do too.
I think with the enormous debt in the country today we need to concentrate only on the must have programs and clamp down on the myriad of overly generous handouts, loopholes.
Agreed. The wife got the $600 Covid disability top up last fall. We certainly do not need it but there was no way to refuse it. It showed up in the bank account. We’re deciding whether to send in a cheque back to the Receiver General or donate it to a charity. I do understand the government felt time was of the essence on this issue.
Great article. I agree on withdrawing RRSP earlier. Without even having to do calculations, I can say that from observing people (in their 70’s) around me who were now drawing down from their RRSPs , they were all concerned (surprised) and annoyed, at how much tax they had to pay. I am not yet fully retired but have started withdrawing from my RRSPs, (take the cut now), and put them in my TFSA account in dividend stocks and ETFs. I also have a lot of contribution room left in my TFSA, so that helps. Mark, it was from reading your content on this website that I was able to take my mutual fund RRSPs and put them in a self-directed investment account. It was a scary move for me because everything I had was managed by my bank, (I really did not understand much). But I came to realize how their fees were eating in to my returns, and since I’ve taken that step I have learned a lot in the process and become more confident and comfortable with my personal finances. Thanks!
Christine, great observation on the RRSPs! I sometimes hear people say how ‘bad’ RRSPs are, how RRSPs are a ‘rip-off’, how they wish they had never invested in them, etc. With a good drawdown strategy and thinking ahead, RRSPs are fantastic and let you win the tax game!
Well done on lowering your fees! The compounding effect is massive in and you can end up with 100s of thousands more (or less!) in your pocket. I recommend my clients keep fees to 1% or less. Self-directed investing isn’t for everyone (we are often our own worst enemies when it comes to buying/selling, reacting to noise, chasing hot stocks, etc.) but you sound cut out for it.
Best of luck!
Thanks Steve! That last sentence is so on point! Guilty of all of those, but it’s part of the learning curve.
Christine, these types of comments and such make my day!! Awesome to read.
Keep up the good work! I also follow The Dividend Guy now since he was introduced in your blogs.
Mike is a fun guy…re: The Dividend Guy. I hope to have him back later this year 🙂
Good points Christine. Nice to read you’ve seen the light!
Yes, I have heard that same stuff for some people. Interestingly to me its from people who did not plan properly re spousal RRSPs or investing in other accounts, or didn’t consider their future pension amounts and/or waited too long to withdraw (forced RRIF) which ended up with them paying too much tax later. Several of these people used financial planners all their lives too. Crazy.
Well, I would think that most of these people started their RRSP strategy around the time of the book “The Wealthy Barber”, and it seemed to be the best bet at the time until TFSAs showed up. I don’t think it is wrong to have RRSPs, but I think it is more useful for people who are in a higher tax bracket than myself for example. I think that most people from that generation tended to trust their financial advisor or planner to set up the best outcome, and sometimes we are not always clear about the specifics at the end of the line. It took me a very long time to accept (in my brain) that instead of waiting to get a return on my taxes in order to invest, it was better to contribute regularly earlier on (I’m speaking for myself only). Like many people, I was excited to get a return at the end of the year from my income tax, however, only some of it went to investing that amount, a lot of it was for “paying off” stuff. I had to put the brakes on and re-examine. Something that I read somewhere, perhaps on this site, I don’t remember, was “2 things to always keep in mind when investing: “fees and taxes”, it’s simple right? but since then I always consider those 2 factors. I pick up a lot of things along the way as do others, my other favourite is from Peter Lynch who said, and I paraphrase “don’t be in a rush to buy a stock, people are almost out of breath when they call you to buy something”. Incidentally, I don’t rule out getting a financial planner myself, they could probably do a more informed assessment than me, but at least now I can feel as if I am collaborating with the professional as opposed to being told what to do without me understanding anything.
Great stuff Christine. We all have to start somewhere and nobody is a perfect investor. You just need to get the big decisions right!
Happy to answer and help via more content over time. Just ask!
Have a great weekend,
Thanks Mark and Steve! Good insight. CPP/OAS question; I will be fully retiring at the end of this year. Age 58.
My goal is to delay both until 70 (if possible). I have 35 years of maximum CPP contributions. I am questioning what effect the next 12 years of zero contributions will have on my benefit? The “dropout years” are a bit confusing. Some things I have read lead my to believe that delaying that long wont add much benefit?
Can you point me to any resources? The CPP website does not provide the answer.
That is outstanding, re: 35 year paid into CPP of maximum is outstanding and far better than most.
I’ve learned to think of CPP as a 39-point-system. You get a point or a year of maximum payments for every year out of the 39.
Since you contribute to CPP from ages 18 to 65, you’ve got 47 years to contribute the max. 39/47 = 83%. So, don’t worry if you didn’t max out some years, re: those drop-out years per se. You just need 39 years or 83% of those 47 contribution years.
If you log into Service Canada and you’ll find your CPP contribution statement and any “M” will be earmark max. contributions.
Steve might have another take but hope that helps!
Yup, I have done the Services Canada thing and I have 35 “M’s”. So is it fair to say that I would get 35/39 = 90% of max, regardless of when I start to take it? I understood the 12 years with zero contributions (58 to 70), could effect that percentage?
Service Canada does not provide such detail.
Hi Chuck, this should not affect the percentage as far as I know. If you’re 35/39, which is amazing, they you’re going to get ~90% max of CPP.
“So here’s the basics: in order to receive the maximum CPP retirement pension of $1,114.17 for 2017, you would need to have 39 years of earnings at or above the YMPE between ages 18 and 65.
If you have fewer than 39 years of maximum earnings, to estimate the amount of your CPP retirement pension at age 65, you can simply total your best 39 years (in terms of a percentage of YMPE), divide by 39, and multiply by $1,114.17.”
In your case, 35/39 = 90% max of what CPP currently pays, assuming you take it at 65. I think if you always assume “39”is the denominator for CPP payments, that’s a good rule of thumb.
It would be increased by 42% more if you defer from age 65 to age 70. Just saying 🙂
It would lower if you take CPP at age 60. With penalties per se.
“This is a good time to remind you that CPP can be drawn as early as age 60 but benefits are reduced 0.60% for each month before age 65. Conversely, you can take CPP as late as age 70 and benefits are increased 0.70% for each month after age 65.”
I hope that helps?
Thanks Mark for the detailed reply!
Go here to get a good calculator. Input your values and presto.
Thanks for this RBull. Checking now
“I understood the 12 years with zero contributions (58 to 70)”
If I am reading Doug’s article on Retire Happy correctly, there is also a drop-out provision for delaying beyond 65.
“If you delay starting your CPP until after age 65, there is an additional dropout provision, known appropriately enough as the over-65 dropout (surprisingly, there is no acronym for this dropout.)”
Thanks Lloyd, good addition I didn’t cover yet.
Thanks for this Lloyd…but wow, I need my accountant to figure out what Doug is saying!
haha…I couldn’t figure it out either so I had Doug do it for me.
Congratulations Chuck on early retirement. You probably have more then 35 years at max (35 M’s) as all the partial years count towards the 39 total as well. I asked Doug Runchey this a few years back. All those part time summer jobs between school semesters added up.
Thanks Gruff. Yes there are some small contributions for a few early years. Good to know they are included!
Yes, all the CPP contributions add up and you are assured if you have 35/39 max contribution years to get at least 90% of max CPP at age 65 (Chuck).
Mark gave a great answer regarding the drop-out years and I don’t have much to add. Good call on deferring!
Agreed, Chuck is smart!
Your newsletter offers many helpful insights, and is much appreciated. One aspect of rules of thumb regarding annual % safe withdrawals from a retirement portfolio that is often overlooked is the tax bite. For example, withdrawing 4% pa from a $1 mm portfolio assumes a 4% minimum annual return to keep the income level. If one needs $40k pa to live off, then the $40k needs to be grossed up for the tax load. At say 20%, that requires a gross withdrawal of $50k before tax, or 5%.
Above assumes no draw down in portfolio principal. Investment income mix, principal drawdowns, portfolio performance and inflation assumptions greatly complicate the determination of a safe annual withdrawal rate and associated taxes payable.
That’s a good reminder why I personally don’t like the 4% rule although it’s a nice starting point.
Just like saving and spending pre-retirement in variable, so is retirement, or at least I think it is since I’m not there yet!
This makes the asset accumulation years easy when compared to withdrawal years. Just my take.
Thoughts? What’s your plan?
I am not the biggest fan of the 4% rule, and Mark and I have discussed it in the past. ALL sources of retirement income have to be taken into consideration and a proper draw-down strategy specific to your situation created.
You raise a good point about taxes. Also, what happens when the portfolio goes up or down significantly each year? What do you draw 4% of- the new total or the original?
Saving, reducing, and maximizing tax shields in our registered tax accounts (e.g., TFSA, RRSP, etc.) are always good ways to understand and use to keep more money in our pockets! However your topic is ‘generating’ income in our retirement, so I would have added possibly selling one’s acquired knowledge, experience, and expertise from a lifelong career, which is greatly facilitated with the technology media that has exploded during this global pandemic. With a little bit on know-how on social media, and some help from the kids & grandkids, plus some creativity, many persons could easily start a blog and monetize it both as a hobby and/or some extra pocket change. Or, hire yourself out as a part-time consultant to someone’s project and share your expertise and add an extra helping hand.
As to generating more income, many retired persons are sitting on a retirement fund, possibly across regular accounts and/or registered accounts, and there are a couple ways to generate additional income. An easy way would be to sell Covered Calls on one’s stock holdings (or ‘synthetics’) without risking the underlying capital…although it could trigger a capital gain if the stock is exercised, but can also buy it back if desired. In addition, depending on one’s risk tolerance and knowledge of options, one could Sell Option Spreads (buy an option & sell an option) and gather the premiums. Both these techniques are arm-chair means to generating income and there are several excellent training programs showing how to do them successfully.
The opportunities to generate income and save in retirement abound and only limited by one’s mind, desire, and maybe physical condition too…hehe!
That’s a good take Michael re: selling one’s acquired knowledge, experience, and expertise.
I know for my wife and I, we hope to work part-time in our 50s and maybe later (?) to do just that. Everyone likes a bit of cheaper labour on demand right?
I haven’t gotten into covered calls myself but my thinking on them is why not just invest for capital gains and avoid less buying or trading?
Bottom line maybe to your final point, if you have health you have wealth. I’ve always mentioned that on my site. Can’t take that human capital for granted. It’s the best asset you can ever own.
Lol, have been retired nearly 7 years and at times I think I’m still trying to figure it out.
RE inflation I think governments and CB’s today are a lot more conscious of “trying” to control EVERYTHING at virtually any cost. It seems like a big experiment to me and I don’t know at all if it will be successful with so much debt, stratospheric markets, record low rates etc. Protecting from what we don’t know is hard so balance it is.
The more income resources one has, the more complicated the situation I assume. I guess you also need to adjust the plan every year as you withdraw much less than you could. That’s a good problem to have. I hope I will have the same problem as you, but the expectation of market return is rather low.
Our situation is rather simple: decent size of RRSP, no pension, long life expectancy. So the principles will be simple: Deferring CPP and OAS as longevity insurance, withdraw RRSP before 70 to smooth out tax curve. But there will be lots of details to figure out and also adjust year by year.
Here’s the deal if you or others are interested. No magic and apologize if its redundant for some of you.
We have one more income resource than some might have, or possibly 2 counting my LIF. (1 work pension, 1 LIF). We start with work pension as a primary resource, then add minimum withdrawal from a small LIF (about 10 yrs worth on only part of my employment income). Next is the dividends paid from unregistered. We also access cash from a HISA (I keep ~60k or so) if needed. The final income source is withdrawals from 1 or both RRSPs to feed the following – top up TFSAs, slowly feed unregistered, and then is variable based on topping up HISA if needed and for additional lifestyle spending if needed. In 3-8 yrs (65-70) we’ll accessing OAS, CPP so will reduce registered withdrawals accordingly. My expectation of returns is lower than most too. I spend 2 minutes to update VPW annually as a very loose guide. Paid $80 for a detailed retirement assets/spending report which also incorporated order of accounts depletion considering tax efficiency. Same as what I already planned and how we’re doing it.
So that’s the balls I keep in the air while considering tax smoothing, and the investments within the various accts – geographical and asset allocations. There are lots of little details but its not too hard and I may in time just go a one fund solution as I get older, when maybe not as interested or as competent.
Thanks for the very detailed information. Will OAS clawback be a concern for you? You mentioned paying $80 to get a report, is that some service you are using?
Once both of us retire, I guess the major thing we need to tackle is melting down our RRSP accounts. While we plan the retirement using 5% market return expectation, I feel for RRSP might need to be a little bit higher. Maybe starting with 6% and adjust to actual return year by year. There are two things we would not like to see happening: RRIF minimum withdrawal pushes our income into OAS clawback territory; We passed away with a big size of RRIF and half of it will be taxed away.
So I guess our withdrawal scenario will be: determining how much we need to withdraw from RRSP first, top that with dividends/distributions from unregistered accounts. From my current calculation, it should be enough for our expenses. If not, sell some assets from unregistered accounts. Meanwhile, maxing out TFSA each year to reduce taxes in the future. If we don’t have extra cash flow to feed TFSA, then might just do transfer in kind from unregistered account to TFSA.
You’re welcome May. I don’t know for sure with OAS clawback but my original report from March 2019 using conservative model 4% return, to age 100 (and my estimates with VPW) is with income splitting we should stay clear. (Although we are ahead of those projections with current markets.) Have to beware of unregistered dividend gross up stuff though. I’m not fussed about it even if we do have some clawback to deal with.
Your order and plan seem similar to us. Makes sense to top up TFSA and keep to the end, especially with longevity predicted. I agree with you on a large potential final tax obligation with registered if both deaths are early, so utilizing it before mandatory withdrawals @71 is likely important. In our case its charities if that happens. I started withdrawals the year I turned 55.
This is the service I used: https://cascadesfs.com/ Not perfect but IMHO worth it for moderate charge. I did lots of scenarios, different returns, delaying CPP etc.
It might be useful to check with Mark on his cashflow and portfolios service.
I also think we will be clean of OAS clawback using 5% market return, even with dividends gross-up. A sizeable part of our assets will be transferred to TFSA too before age 70. But I want to be prepared in case I got lucky and market would be actually good to me.
In early retirement years, stable income that will not be affected by market volatility will be important to us so our main focus will still be on dividend growth investment. Also a combination of RRSP withdrawal + Eligible dividends will be most tax-efficient for our medium income in retirement years. When we are getting closer to 70, I think I will exam my portfolio every year to see if I should change the investment in non-reg accounts to shift more to capital growth instead of remaining on dividends.
https://cascadesfs.com/ right now has a free trial and I have tried it a little bit. Very nice tool.
You may want to consider hitting us up for any projections too May?
No obligation of course but something to consider!
Thanks. I will definitely consider it when time comes.
Great! Never an obligation. I will be here on MOA and keep writing and having fun with you and others.
That’s fair May, re: sizeable RRIF. Check out my beneficiaries post on RRIFs:
Overall, there are huge benefits (I see) to killing off RRSP/RRIF assets while you are both alive and winding down any taxable account to zero to avoid any probate concerns. I intend to keep TFSA assets “until the end” unless my financial plan/numbers tell me otherwise.
I see my drawdown plans to avoid any OAS clawbacks as: RRSP/RRIF or Taxable > TFSA. It is very likely all our RRSPs/RRIFs are gone by age 70.
I figure if I keep deferring CPP until age 70, assuming I work full-time for another 4-5 years, I’ve calculated our CPP + OAS benefits for us as a couple will be about $50K per year at age 70 in today’s dollars. That’s pretty good. I could almost live off that! A lot can happen in those 25 years or so for us though. So, will keep saving and investing until then.
Wow, $50K CPP+OAS, you CAN just live off that for sure.
As we probably only get average CPP and not max of OAS as immigrants, ours will be much less. My calculation is shy of $40K at age 70. That’s still worth almost $1M.
I don’t think our RRSPs/RRIFs could be gone by age 70, nor it’s desired. But definitely want to melt down to a reasonable size.
Mark, darn nice number for you and not too shabby for you either May, with less time in Canada!!
I see that with not melting down RRSPs by 70. I think that’s mostly people with pensions they’ve contributed to for lots of years leaving less contributory room or for folks making smaller contributions. I think it will be closer to age 85 to melt most of ours, and I will need to raise my withdrawals a lot from what we have so far to do that.
Delaying to 70 for both CPP/OAS for us is about $52,087 gross per year – about 8 years from now. Both of us had less than full CPP contributory years and less than max YMPE at times.
Yes, decent for sure, and for those reasons, may make sense to defer past 65 for both of us.
Looking at our spending/needs and registered acct balances I think it does here, unless something financially significant happens to change that. More time to bang those down some.
I’m sure you’ll be in the same position.
I’m trying to catch up to you!!!
haha. You will. I’ve been in decummulation mode for 7 years and you’re really ramping it with both savings and compounding! And with a ton of non growth FI here!
Buying a newer car next week so pulling it down again. Maybe a 4 wheeler soon too. LOL
Live it up!!
Well, that’s for both us = x2 CPP + x2 OAS = $50K per year at age 70. That’s also, if we work at good paying jobs and if max out CPP contributions for the coming 5 years or so AND if we stop full-time work around then too.
Lots of “ifs”.
We’ll see May. Life has many curves and changes and new adventures sometimes!
Yes, I’ve always liked the idea of CPP and OAS deferrals, ideally to age 70. This way, you have less personal finance risk with your own investments. I wouldn’t rule out an annuity from our personal assets if we have any left in our 70s or 80s. We’ll see what bond rates are then in 30 years.
I’m with you on CPP and OAS deferrals, as we’ve talked about a lot. I also think annuities are a good idea for SOME people with SOME of their money. E.g. I have no defined benefit pension plan and no heirs, so it is something I will look at.
Right now for a 65-year old male, you can get around 4.5% guaranteed. Using 25% of your non-registered savings for guaranteed income isn’t a bad idea.
Agreed Steve, annuities can be a consideration for some if they feel they want/need that income security. Again, doesn’t have to be an all-in decision; nobody says you need to pile all assets into those products. I recall Alexandra Macqueen shared some great insights here:
You hit it on the head, May and you seem to be well-prepared for retirement.
Ideally, we would have TFSA and non-registered investments as well – this gives flexibility in retirement and helps with reducing taxes as all of the income isn’t coming from fully taxable accounts (RRSPs).
Thanks, Steve. I think I am prepared but still hard to take the leap.
I see these prolonged low-rates as a massive government and BoC failure. I cannot see how this is going to end well over time for many. I’m going to continue to save and invest just in case.
100% AGREE on that failure. It has disturbed me for many years. I also don’t see how it will end well.
For prudent people with the means there is no good choice but to save and invest. And they will be the ones paying tax and helping others not as prudent. However it could be worse.
Yup. I don’t see an alternative but to stay invested, own more stocks over time, and continue to build up my cash wedge to pay more taxes.
Those days are coming….
Good post. I am one of several Canadians (ha) looking to also protect against serious inflation or hyper inflation.
I don’t think it will happen. But I can’t afford to make that guess. It can wipe out retirement plans.
I think we’ll see some decent inflation late Spring and into Summer, but it’s likely head-fake inflation (as a guess).
Most of the forces in the developed world are disinflationary. aka the last 40 odd years and more. Higher taxes and ridiculous levels of government debt will also pile on, add on to the disinflationary force.
But ya never know what will happen. 2020 taught us about black swans.
More elevated currency debasement is another risk.
Dale @ Cut The Crap Investing
I don’t think hyperinflation will happen either but you never know. That’s why you need to protect your portfolio from various scenarios. I’ve always owned a number of utilities for example, might be just over 10% of overall portfolio because last time I checked – everyone loves hydro and electricity. So, good for good markets and good for bad markets. An essential service. Do you need Facebook? Hardly. The platform is terrible. 🙂
You never know what might happen is right!
Keep calm, hedge on.