RRSP withdrawal strategies before age 71
Some time ago I wrote about generating retirement income.
We’re doing some income planning now because we feel the process of planning (and re-planning) is important for our financial well-being. This income planning process includes our RRSP withdrawal strategy before age 71.
Otherwise, without retirement income planning these will be our defaults years from now:
- Save more
- Work longer
- Spend less
None of these seem ideal!
To date we’ve decided on a bucket approach to earning income in retirement.
I’ll update this approach above as things evolve over time but we believe this is a great approach to start any semi-retirement with.
I’ll explain:
- Bucket # 1 = cash savings. We intend to keep at least one years’ worth in cash to cover basic living expenses. This money will be maintained as cash savings. That is likely somewhere around $50,000 in cash. The $50,000 in savings will cover some emergencies if they happen without selling any assets.
- Bucket #2 = dividend income. Our plan calls for holding a few Canadian dividend paying stocks to help us generate income. I figure about $500,000 invested (lofty goal I know….) in such companies should yield at least $20,000 per year in tax efficient dividends (invested in a taxable account) and tax-free dividends (invested inside a TFSA).
- Bucket #3 = distribution income + RRSP withdrawals. To reduce our “home country bias” we intend to keep our RRSPs full of U.S. stocks and U.S.-listed Exchange Traded Funds (ETFs) that own hundreds if not thousands of stocks from around the world. This means we’ll continue to own more indexed funds in our RRSP for market-like returns. Doing so improves diversification beyond my bias to owning some Canadian stocks earlier in my DIY investing career.
RRSP withdrawal strategies
One thing I remain fuzzy on is when we should take money from our RRSPs.
Shall we wait until age 71?
Do RRSP withdrawal strategies before age 71 make any sense?
If so how might this decision fit into our overall plan?
Conventional financial wisdom has typically informed investors to keep RRSPs intact until age 71, when you’re forced to convert your RRSP into meaningful income.
Some financial advisors believe paying tax on your RRSP savings, years before you have to, is a flawed strategy. Doing so you give up years of tax-sheltered compounding power.
I’m not convinced. Tax implications are not always the best reasons for any financial decision – although they can be important ones.
I’m personally not a fan of keeping all our RRSP assets intact until age 71.
I’ll come back to that in a bit.
Key RRSP withdrawal strategies
Let’s recall, you have a few choices when killing off your RRSP:
- You can cash it all out
An option but not likely a good one unless you have a small RRSP. This is because of the tax hit associated with this move; a good chunk of your money could go to the government in one swing.
- You can start a RRIF (Registered Retirement Income Fund)
For what it’s worth, this is going to be my option unless someone can convince me otherwise. I can hold the same investments inside my RRIF as my RRSP; those assets can deliver my RRIF minimum withdrawal requirements, and for estate planning purposes I can designate a beneficiary as a successor annuitant. This means my spouse will be able to take over from me and she’ll continue to receive my RRIF payments after I am gone. Additionally, and lots of people don’t think about this, you can start a RRIF long before age 71. You don’t need to be 71. You can also only use a portion of your RRSP to start a RRIF. It’s not an all or nothing deal.
- You can buy an annuity
This is essentially a one-way contract with an insurance company. An annuity provides predetermined payments for the rest of your life. An option, yes, but not for us.
Do RRSP withdrawals before age 71 make sense?
I believe so.
The future considerations for us in doing so are the following:
- to smooth out taxes over many years,
- to use income when we want it most, in our potential semi-retirement “go-go” years, and
- to defer inflation-protected government payments such as CPP and OAS.
- to split income.
Here are more details…
1. Early RRSP withdrawals can help smooth out taxes
RRSP income can create clawbacks on income-tested programs, such as Old Age Security (OAS). RRSP withdrawals are fully taxable. So, if we combine income from our pensions, government benefits and investment income, we could in the future end up paying more taxes then necessary the longer we defer RRSP assets.
Taking out money from our RRSPs, slowly over time, can help smooth out taxes over time.
2. Early RRSP withdrawals can deliver income when we want it the most
I could be wrong about the future but we’re probably in the best physical and mental shapes of our lives, now. I suspect it will be a different story in our 70s. My wife and I have decided that using the RRSP money, sooner, in our 50s and 60s is better. We believe retirement or semi-retirement will be more than just smoothing out taxes. Using RRSP money before we have to is very much a lifestyle choice. We prefer not to defer our lifestyle any longer than we have to. Life is short. Enjoy it!
3. Early RRSP withdrawals can help defer inflation-protected income
We’re lucky and we know it. We have workplace pensions.
The downside (if there is one with pensions) is you’ll need to defer them to gain any meaningful income. Taking our workplace pensions at age 55 comes with major early withdrawal penalties. Even taking our pensions at age 60 comes with reduced payments. At age 65, there are no penalties involved.
Same goes for Canada Pension Plan (CPP) and Old Age Security (OAS) – the longer you wait to take these benefits the more income you’ll earn.
Government benefit examples – deferral to age 70.
CPP benefits increase by 0.7% per month up to age 70. This means delaying CPP from age 65 to age 70 will yield another 42% in benefits. This could mean close to $1,000 per month for most individuals who have contributed to the plan throughout their career.
OAS benefits increase by 0.6% per month up to age 70. This means delays to OAS income from age 65 to age 70 will yield another 36% in income. That income could be close to another $1,000 per month for many Canadians.
Between those two government benefits, this is not trivial income.
Now, deferral of pensions and government benefits have big risks. First of all you need income to supplement what you are deferring. Second, you need some assurance of longevity (otherwise, why bother deferring money if you die young?). Third and just as importantly, you need to consider how investing losses with your personal assets may kill your deferral plans. All plans seem great when markets are good. Plans also need to protect you when markets are bad (and stay bad). Deferring our inflation-protected fixed income sounds like a good idea but we’ll need to ensure our personal assets are more than enough to bridge the gap.
4. Early RRSP withdrawals or RRIF income can be used for income splitting
Finally, you might already know that pension payments from programs such as CPP (Canada Pension Plan) and OAS (Old Age Security) are not eligible for pension splitting regardless of age.
However, if you are the recipient of the pension and are 65 or older, you may split income from your RRSP, RRIF, life annuity, and other qualifying payments. If you are under 65, only certain life annuity payments and amounts received from the death of a spouse (such as RRSP and RRIF) are eligible for pension splitting.
Unfortunately lump-sum pension payments, foreign pension, transferred RERIF amount, and non-registered pension plans are not eligible for pension splitting.
Are RRSP withdrawals before age 71 good strategies?
The good news is personal finance is personal.
You can learn about other strategies people are writing about or taking to tailor your financial plan.
Given the ability to smooth out taxes over time, use the money we’ve saved when we’ll most enjoy it, and to defer workplace and government pension benefits to optimize their benefits – we’re intending to withdraw money from our RRSPs for income before age 71.
That’s the plan but plans are always subject to change. 🙂
For those planning for retirement, near retirement or in retirement – what factors did you consider for RRSP withdrawals before age 71?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I have a question. Can I turn my RRSP’s into RRIF before I turn 71 years of age and not have to remove a certain percentage every year? I believe that is true.
By turning my RRSP’s into RRIF’s early, this allows me to split or share this income with my spouse. Is this correct? Thanks
Hi Ross,
Yes, you can absolutely turn your RRSP into a RRIF before end of the year age 71.
https://www.myownadvisor.ca/rrsp-withdrawal-strategies-before-age-71/
“Additionally, and lots of people don’t think about this, you can start a RRIF long before age 71. You don’t need to be 71. You can also only use a portion of your RRSP to start a RRIF. It’s not an all or nothing deal.”
As soon as you start a RRIF however there is a withdrawal schedule.
https://mdm.ca/investing/investment-accounts/rrif/rrif-annual-withdrawals
Yes, you can split income from RRSP or RRIF as of age 65.
https://www.cibc.com/content/dam/personal_banking/advice_centre/tax-savings/income-splitting-strategies-en.pdf
Hope that helps!
Nothing wrong with bird in the hand as long as people have done all the math and the thinking on the other side of the coin. ie Running short concerning longevity. However, anecdotally it “seems” to me that is often not the case.
Well hopefully you’re right about that with us Mark. You’re making the right moves now to create your future options with OAS/CPP timing.
Time will tell eh? 🙂
Mark
For sure.
I’m on a little break now from looking into a nice early winter vacation for us. Waiting for a call back!
Good for you. Home for weekend – time for a cold one or two 🙂
John, good point on survivor benefits that I agree not many people seem to mention or think about.
Doesn’t sound like dropout is going to have any effect on you. This is a calculator that might help you: http://www.holypotato.net/?p=1694
We have many less years of employment/contributions than max so delaying CPP, while beneficial is less so than others who worked longer. Still have another 2 years before we could apply at the earliest, but I’m leaning towards at least age 65 and maybe later.
Mark, I can see the “gravy plan” when you’re still many years from collecting. I did the same during accumulation years but now expect to collect CPP in our plans. The puzzle is when. OAS to me is really a wildcard with it being funded from general revenues with increasingly cash strapped governments and a growing retired population.
@Rbull
You hit the nail squarely on the head re OAS – governments are unpredictable and fickle.
Mind you messing with what is perceived as an “entitlement” (read OAS) can cause significant political fallout (see Mulroney’s attempt back in the 80s). It maybe boil down to a generational conflict :).
Personally I took CPP at the earliest date (too many dropouts – intentionally ) and will take OAS at the earliest date also even though both do not factor into my financial well being (i.e. both are beer money).
The biggest difference, I feel, between having the money in hand versus deferring is that both benefits cease upon your demise (hopefully not early!) versus the cash in hand persists, and should you die, without starting the benefits, it all goes into government pockets.
Fb, re CPP, I think this is a good example of how we find it easier to think of short term risks rather than long term risks. Provided you have enough money to live on, it usually makes sense to defer CPP to age 70 as it is really longevity insurance – in case you live too long. You don’t have to spend less from 60-70, just from other resources. If you do die early, well, you are dead, so it doesn’t matter that you didn’t get that particular pot of money – you are dead! Deferring CPP to 70 is about insuring against living too long. That is a long term risk.
@ Grant
yes that’s one way of looking at it
as I mentioned my financial well being is not predicated on government benefits so the longevity insurance aspect is moot (for me) – also if I defer benefits I have to use up (spend) some of “my” resources instead of the CPP/OAS and should I demise prior to collecting CPP/OAS then those resources are not available in my legacy – who wins? the government.
Each to his own interpretation 🙂
I find solace in the words of that famed philosopher Bugs Bunny – “Don’t take life too seriously. You’ll never get out alive”.
That’s the way I see it as well. Deferring CPP is to fight longevity and to assure you, government policy changes aside, to get the maximum government benefits you can.
You’re right fbgcai. I would add income tax rates, capital gains inclusion rates, eligible CDN preferred dividend rates, OAS clawback levels, HST rates etc all fall into the vulnerable category when speaking of government being unpredictable and fickle. I agree monkeying with OAS will not be politically popular with a large group of the (voting) population.
I’m still at the consideration stage of timing these “benefits”. LOL, you drink a lot of beer! (I make my own to keep costs down and as a hobby of interest.) CPP/OAS would be a lot more than what I’d consider small with an estimate of total PV for the two of us @65 is nearly 34K.
I’m not concerned about CPP in my lifetime after looking into the sustainability. There’s a stronger argument it could sustain higher payouts even now vs. implode later. I tend to view when to take CPP benefits perhaps differently- less worried about getting what I can early on in case they might change, or dying early and not collecting much, than living longer, running out of funds, and capturing more indexed money. OAS, could well be a different story. Grab it or as much of it as you can and run. OAS also has less benefit to delaying than CPP.
I definitely see the “bird in hand” argument for taking CPP and OAS when you can, even if you don’t need the money.
The key for you is….”when”. Given what I know you’re assets are more than enough to see you through. You know when you’ve saved enough when you have options to figure out when to take CPP and OAS. Something I aspire to!
#firstworldproblems
I worked it out by treating the CPP payouts as life annuities and looking at the capital required to achieve the CPP payouts at 60 vs 65 using annuity tables. Looking at it as an annuity, where the payout is roughly $1 income per $20 in capital, to go from $8600 a year to $13000 a year, the difference between claiming at 60 vs 65, requires almost another $100,000 in capital. If you took the early CPP payments at 60 and just reinvested them, you would have to be able to take the $8600 and turn it into nearly $100,000 to generate the same income increase you’d get as waiting to 65 to claim it. A tall order for something that needs to be treated as an ultra low risk investment.
On the other hand, the argument for taking it at 60 because the break even isn’t until 74, and those are your most active years, is also a powerful one. So I came to a simple conclusion:
If you have a use for the money, or need it to live on, take it as early as possible and enjoy it.
If you don’t need the money and would just reinvest it, you are way ahead to leave it alone and not claim it until you need it.
That seems about right…re: 5% more between age 60 and 65 for annuity – needing another $100K in capital.
The thing is though, most people that take CPP at age 60 do so because they need/want the money. They have no idea about longevity so it’s bird in hand kinda thing. So, back to the deferral, the key reason for doing so might be either a) tax reasons or b) longevity risk or c) both. Otherwise take the money early and enjoy. I’ve got 20 years to figure it out and I’m sure I’ll change my mind a few times 🙂
I did just one annuity quote RBC – single male, age 60, no guarantee = $1 per 17.5 capital. $100K = $5707+/yr
I’ve got to do some of this calculating myself, but I know our CPP is not that generous with excess drop outs, the 60/65 is less generous than your example (approx 40% for us) and breakeven age is higher, although I think indexing and taxes have to be considered into this also.
Thanks for your example.
I’m still trying to figure out if the dropout effect has any impact on me. I’m 60 and have already made the maximum contributions it’s possible to make. I’m retired now, but haven’t applied yet. Because I can’t add any more contributions, I’m assuming delaying collecting while not working doesn’t make any difference; I collect the max minus the early penalty at any time I apply. But I’m not sure.
I should mention an important little ringer related to CPP that is not widely understood. An individual getting the survivor benefit has the survivor benefit capped at the individual’s maximum CPP! So if you have a couple that both collect the max, then one dies, the survivor, being already at their individual max, gets zero survivor benefit. The only way for the survivor to get the full 60% survivor benefit (assuming someone collecting the max) when they kill … , er, when their husband dies, is if their own CPP is 40% or less of the max. In my case my wife is only entitled to about 6K in CPP at age 65, so if I croak, she can collect most but not quite all of the 60% survivor benefit from my CPP, 60% being about $7800. With her collecting 6k she would be capped at a 7000 survivor benefit because it brings her total up to 13k.
Depending on the situation, this can be a strong argument for taking it early just to be able to get as much cash out as possible for the spouse who is likely to die first.
I was using joint life rates which are more like $4800 per hundered K, but in any case it’s only as a way to capitalize the income stream for comparison purposes. With those being fixed annuity rates, CPP is actually a much more valuable pension than an annuity because it not only is indexed, but the indexing is open ended. I can buy an annuity with a defined inflation index rate of say 2 or 3%, but it’ll cost say, 130-140 grand instead of 100 grand to get a fixed 3% indexing rate on a life annuity with the same initial payout (I’m just pulling numbers out of my head here). An annuity that is indexed to whatever the inflation rate happens to be? No insurance company will touch that with a 10ft pole. This makes CPP a much more valuable pension than most people realize, in terms of the theoretical cash value of the income stream. Using annuity rates you might come to a cash value of CPP at say 250K, but with open ended indexing included, I’d say the theoretical cash value is more like 350-400k.
Cheers
That’s one thing I need to factor in if we “retire” early – less CPP. My goal is to consider CPP and OAS “gravy” and not require it. I think if we keep saving like we are over the next 10 years I am confident that will be the case but you never know!
Mark, The strategy of delaying OAS and CPP is very interesting. You are increasing your guaranteed funds for your retirement. My wife and I had always thought of taking them early. Assuming you have enough to fund this strategy… What are your thoughts on assessing how your RRSP would have to perform if you went the other route and took them early? Would be interested on your thoughts on what should be considered to assess this.
It’s an option for sure SteveO, not “there yet” with all my thinking but an option….
If I decided to take CPP and OAS as most do (at 60 and 65 respectively) I’m thinking our RRSPs would still need to exist until about age 70 or 75, given a die-broke scenario until age 95 for us. 80s would be about drawing down all non-reg. assets and 90s would be selling our home and using it for old age care.
I would personally have to run a bunch of simulations and closer to retirement, I will. I do however like considering various options now because it’s helping my process of planning and re-planning. Cheers.
I’ll run a simulation with the spreadsheet I have and see what the numbers show. It may not consider all scenarios but hopefully I’ll come away knowing that my RRSP’s would have to earn XX% to equal the same return from taking the OAS and CPP later and still providing the same cash withdrawal and ending up with the same $ upon death. Will have to wait for another rainy day to start…
The HELOC is an incredibly versatile financial tool and we have maintained one on our last 3 houses over the last 20 years or so. When we need to purchase something (like a used car or other big ticket purchase where factory give-away financing isn’t available), we draw on it, and when there is surplus income, we pay it down. It’s like a business current account. It’s not for everybody for sure; people who burn through every dollar set in front of them will quickly run up a huge debt buying toys if you present them with a couple hundred grand in credit at 2.8%.
As a retirement income strategy, the use of debt here is similarly very limited and is a replacement for a cash reserve that allows the cash to be put to work elsewhere. I could keep 25000 in cash in a high interest savings account that is on tap any time I need it but earns .5%, or I could invest that cash in an income producing investment that earns $5-6% a year and just use the credit line as a cash reserve and pay the 2.8% IF I had to draw on it.
Thanks for the suggestion on the fees. Perhaps RBC will agree to waive them if I threaten to pull my money out.
Cheers
I think I struggle with the entire HELOC thing John because I already have mortgage debt. Maybe I will feel differently when I have no debt and I could take on some (not lots) for leverage or other purposes short-term. Right now, I have a small hate-on for debt!
I intend to keep a modest cash wedge (at least one year of expenses – say $50K) ready, on demand at all times. I feel that’s important to hedge some risks. I hope to earn about 2% or so on that. Just enough to keep up with inflation but that’s about it. Otherwise, I intend to keep my capital at work to churn our dividends and/or distributions.
I would be interested to hear what you find out from various brokerages. You don’t know until you ask!
John, at RBC an individual needs 250K in assets to be a Royal Circle member, and then it will also extend to all family members. One of the benefits is RRSP withdrawals are no charge-no limits. Very simple DIY process. If however you know want steady income monthly forever a RRIF might be the answer for you anyhow.
I have a Heloc and a LOC but do not use them. You can earn 2%+ HISA’s elsewhere.
Geez I’ve been with RBC DI for years and was unaware of Royal Circle. I’d say that with no deregistration fee there is no point in a RRIF until it is mandatory to do so. Thanks!
You’re welcome John. That’s somewhat my thinking as well. However in our case at age 65 I’ll likely convert some RRSP to RRIF since at that age it becomes eligible as pension income for income splitting (under current rules), which will be good when wife’s pension loses bridge.
RC also qualifies you for preferred group rates at RBC Insurance for home/auto. It is very good value for us, even though RBC is now just the broker after selling insurance division to Aviva. I’ve been averaging about 15-20% lower on insurance for quite a few years now. There are other RC benefits like live quotes/trading desk etc.
Also RBF2010 pays .7% in your investment account and always seems better rate than in RBC savings.
G/L
Thanks for confirming RBull….RBC Royal Circle.
Anytime.
Below, I meant to reply to John.
Hi Mark
We are very financially disciplined and have been using a HELOC as a slush fund to smooth out our income for years, either for major purchases or for those periods where several insurance bills or reno costs come due at once. The balance meanders up and down, sometimes it’s at zero, sometimes there’s a balance of 25k. The interest rate is under 3%. Instead of using a cash balance to provide a cash reserve in retirement, we will use the HELOC and keep the cash earning 6 points in my dividend income portfolio, still making money on the spread even if there is a balance.
I had planned to leave all our investment funds in existing self directed RSPs and just make withdrawals of dividend cash distributions from them, but then I realized the 50$ de-registration fee any time you draw money out of an RSP would quickly add up. If I was pulling money out monthly, from 3 different self directed funds (mine, wife’s and spousal) holy crap 150$ a month just to get at $2500 of my own money! Even doing it quarterly it’s gonna be $600 a year. So far I haven’t been able to find a financial institution that will let you hold a self directed and make withdrawals without the fee.
It makes sense therefore to convert them to RRIFs as soon as we need to start drawing income, regardless of age.
Interesting take on the HELOC as a flush fund. Why do you feel that way?
I’ve always been convinced, I think for us, that no debt is better than borrowing from your future self (HELOC) or others.
When it comes to the 50$ de-registration fee, I suspect you could ask to get that waived if you wanted to; you would need to ask though, this may require you to have significant assets of >$500K. I would have to shop around and research what brokerages don’t have such a fee. Maybe RBC Royal Circle members?
Thanks for the comments.
Mark, I think this is an area where it is a good idea to pay a financial planner who has access to good quality retirement modelling software to better understand the trade offs between leaving money in an RRSP to get the benefits of tax deferral (at least in the part you own as opposed to the part the government owns), and taking money out of your RRSP early to avoid bing bumped up to a higher tax bracket (especially OAS clawback) at a later date. Also for timing of CPP/OAS. Many, possibly most, people are better off delaying CPP/OAS to 71. Doing that you don’t have to spend less, you just spend from a different bucket and get the best inflation adjusted annuity at 71 that money can buy.
You’re likely right Grant. I may get the advice of a fee-only financial advisor at some point – or buy some software and run my own simulations. I am MOA (My Own Advisor) after all. 🙂
Kidding aside I know where you are coming from and I appreciate that.
I think if I can draw down our assets in our 60s then it might make sense to hold off taking CPP and OAS until age 70 – as you say, the best inflation protected pension around. I figure my workplace pension + CPP + OAS + dividend income (inside TFSA) will be about as tax efficient as it can get in my 70s.
Mark you might want to check how the “dropout” years (i.e. years where there are no CPP contributions due to no earned income) will affect the end CPP payout. I ran into this as I my income was primarily not earned (mainly dividend) when I retired early and the net effect was to reduce the CPP payout if I deferred to age 70 – this was based on the Service Canada numbers sent out at age 59 or so – bit of an eye opener – made the decision to take CPP at 60 much easier.
For sure fbgcai…thanks for that. Our ideal plan is to not rely on CPP or OAS for any income although we should expect some 🙂
Did you always consider CPP “icing on the cake” or did you need that to factor in your income needs? Curious. Cheers, Mark
@Mark – I never considered any government controlled(CPP)/supplied(OAS) benefit in determining when to stop working/retire whatever you want to call it – it’s all beer money to me. It is a nice extra to have but I certainly to not depend on it because of the uncertainty involved – i.e. governments who will bend and shape policy to meet their political needs rather than anything rational.
That’s probably a very good way of looking at things – gravy!
I totally agree – governments will often shape policy to meet their political needs rather than anything rational – which is why we must look after ourselves financially. I’ve always thought this way but I know many people don’t feel the same. They continue to believe “the government will take care of me”. Nonsense.
Hi Mark
Thank you and for sharing your impressive financial roadmap. It’s great to see what other like-minded people are planning for their retirement.
Fortunately or unfortunately, I am there now, for the past couple of years. Next year I will be forced to take the mandatory withdrawal from my RRSP/RRIF.
Currently, my wife and I are living off CPP and OAS income and only touch our other savings (investments and savings) for large expenses (e.g. holidays and house renos). We have been debt free for the past 10 years and quite comfortable with our situation.
Your article on RRSP withdrawal strategies before age 71 where you mention “deferral of pensions and government benefits have big risks. First of all you need income to supplement what you are deferring. Second, you need some assurance of longevity (otherwise, why bother deferring money if you die young?)” .
Being in this stage of our lives, we have seen many friends go before us. We were debating whether to take our CPP and OAS when we were eligible or wait for a bigger payout. After reading many articles on this, and seeing our friends go before they collect any of their CPP and OAS, prompted us take them when available. Although we do not need them when we had employment income, it grew our “retirement funds”.
Ciao
Jon
Thanks Jon 🙂
That’s impressive you can live off CPP and OAS – that puts you likely in the frugal category but certainly no debt helps.
I suspect our costs will go down considerably in retirement because we’re not saving for it – the opposite paradigm if you will.
Seeing your friends “go” early is a good reminder to consider taking government benefits when you can. We’re all sadly on a clock.
Continued success with your investing journey.
Hi Mark,
We are not into the mandatory RIF yet but getting close. We have started to withdraw a little from our RSPs and move as much as we can into our TFSAs but the amount withdrawn is low enough to leave us in the low tax bracket for now.
Investments definitely follow the same three pronged approach – short term cash equivalents, medium term where we can afford a few wobbles along the way and longer term where a market correction will probably not hurt us.
Being a lot more cautious than you, we don’t have as much in foreign etfs as you suggest, instead there is quite a chunk in mid term commercial bonds that are paying a nice steady interest rate of between 3 and 5 percent. Not spectacular but it is more than keeping up with what we spend.
A company pension? I have heard of them but not in this household.
Well, our pensions are not gold-plated but we won’t discount the value they have to our financial health.
I’ve read emails and comments from many retirees (including early retirees) over the years and they all seem to do the same thing now – withdraw from RRSP to put as much money into the TFSA as possible. Seems very smart to me.
Hi Mark
I love your articles. I retired at age 65 one year ago. I have a modest defined benefit pension from the four different companies I worked for. I have not as yet taken CPP, OAS or done anything with my RRSP. Using a little bit of savings, plus the pension plans, are more than enough to get by and take the odd vacation. Being debt free is a huge benefit. My whole philosophy on when to take CPP, OAS and use the RIF, is that I will only do so when I NEED the money. Its not about tax avoidance or maximizing saving, it is about getting through life with enough money when I need it.
Regards
Paul
Well thanks Paul!
Impressive you don’t yet need CPP or OAS or RRSP assets yet at age 65. I believe this certainly means “you have enough” and you have planned well.
I can’t imagine how liberating being debt-free must be. My wife and I hope to be there before age 50 – and with a modest portfolio already in the bank – it is our hope we can enter part-time work at age 50 if possible. That would be a nice reward.
Good stuff Mark. As I’ve said before, this is by far my favourite topic.
i’m 64 and have been retired for 4 years. I don’t have any work pension. I started collecting CPP at 60 when I retired. I plan ontaking OAS right at 65. My wife was a stay at home Mother so no CPP, etc.
We have a similar approach to you except no ETFs, just dividend income/growth stocks so we only have buckets 1 & 2. We currently have $50k in bucket 1 but we are going to grow that to $100k in the next few years. Our average current yield is 5.3%. Just about all of our investments are Cdn financials, utilities, telecom, REITs, and midstream/pipelines.We don’t have any fixed income, 100% equities.
A couple other comments:
– we think both the federal and our AB prov gov’ts are an absolute mess so we are getting what we can when we can.
– we also think that income taxes are going to continue to go up so we are withdrawing as much as we can from our RRSPs while staying in the 2nd bracket (< 91k or so). We just do in kind transfers to our non-reg accounts with the extra. I set up a spousal RRSP for my wife way back and also made her a loan when I retired to start her non-reg account.
– it's important to note that dividend income inside an RRSP is deferred but when it's eventually withdrawn, it comes out as income so good-bye dividend tax credit. I just did a test with taxtips and dividend income in AB in the 2nd tax bracket is only taxed at 8% or so. Much better than the 30.5% for income.
– we realize that this type of portfolio isn't for everyone but even with our cash withdrawals to live on and the extra taxes on the RRSP in kind transfers, our portfolio is still up over 25% since I retired.
Take her easy
Don
Good to hear from you Don. Your portfolio and plan sounds solid.
Impressive you have DG stocks churning out that much solid income. I think a good cash wedge ($50K to $100K) is smart in retirement. I suspect you have chosen the DG route to a) fight inflation, b) avoid bonds and fixed income, and c) partly to “live off dividends” and keep your capital intact.
I agree with the taxes are only going to go up philosophy. This is why the TFSA is great and the more you can use it to shelter dividend income the better.
Hey Mark
Thanks for the reply. Spot on about the DG route with additional comment that DG stocks tend to have less volatility and tend to appreciate quite nicely (a few of our favourite holdings – AQN, BCE, BEP.UN, BIP.UN, BNS, ECI, EMA, IPL, PKI, PPL, RY, VNR). The capital appreciation on each since we purchased is between 30 and 140%.
On point c), we actually generate way more dividend income than we need to live off so we are using the extra to build up a bigger cash wedge and we have started to dole out a bit of our inheritance to the kids. It’s really cool to do when still alive to see the kids appreciation and gratefulness.
One other point on holdings – no oil & gas producers, no commodities, no cyclicals, no consumer, no health care, no tech. I find all of them to be too volatile and/or to have unreliable dividends.
Ciao
Don
I have similar favs: own all big 6 banks, all major pipelines (IPL, ENB), all big telcos, and a big fan of utilities like FTS, EMA and AQN. The latter has had a great year to date.
I hope to do the same…use extra dividend income to build up a cash wedge. I think for the foreseeable future with bonds the way they are, a sizeable cash wedge makes far more sense; then “live off dividends” and distributions to the extent possible. This keeps capital intact or intact as needed in older age and you get the benefit of more real return. I could be wrong on this approach working so well but it seems to make perfect sense long-term.
I do own a few O&G (Suncor) and some healthcare (like U.S. pharma) but that’s about it.
Continued dividend success to you.
Don, the loss of dividend tax credit thing is a common misunderstanding about RRSPs. You don’t pay any tax on the growth of your investments inside an RRSP, or when you take it out – at least on the part the RRSP you own, as opposed to the part the government owns. 0% tax is better tan 8% tax. More on that here.
http://retailinvestor.org/RRSPmodel.html
@ Grant
Pardon? yes you don’t pay tax on growth WHILE the money stays inside the RRSP.
Once it is withdrawn (taken out) either directly from the RRSP or eventually as a RRIF draw the FULL amount is taxable as ordinary income – there is no part you own or what the government owns
– it is all ordinary income in your hands at whatever tax bracket you are in the year that the payout happens – this is not “tax free” unless your total income is below your deduction threshold is which case we’re dealing with someone approaching poverty levels.
your reference plays a little fast and loose with tax rates assuming a “preferential” capital gains tax of 15% – where is that in the tax code?
and a withdrawal tax of 30%? no it’s whatever your marginal tax rate is which can exceed 50% depending on where you live and how much income you have.
I don’t mean there is literally your own and a government owned part of your RRSP, but it is helpful to view it as though there is. By that I mean, assume the marginal tax rate is 50% for when you put money in the RRSP and when you taken it out. Say you contribute $20,000 to your RRSP. You get a tax refund of. $10,000. Now, in your RRSP you have $10,000 which is yours and $10,000 which effectively belongs to the government, and $10,000 outside your RRSP. Say, years later this money has grown to $100,000. If you take it out, $50,000 is owed to the government, (the tax due on the $100,000), so effectively your initial $10,000 in the RRSP has grown tax free to $50,000 and your get to take it out with no tax due (same as the TFSA). The other initial $10,000, effectively the government owned part, which has grown also to $50,000 is returned to the government. That’s the 50% of your $100,000 RRSP that is due as tax at the 50% marginal tax rate, when the money is withdrawn from the RRSP. Of course you still have the original $10,000 tax refund (plus growth) from the initial RRSP contribution.
I couldn’t find the comment about the 15% capital gains tax, but he may have been referring to the 50% capital gains inclusion rate, which, if using a 30% marginal tax rate, would give you an effective capital gains tax rate of 15%.
ok thanks Grant for your explanation – it’s a bit of an odd way of describing the RRSP process
You could in theory actually get the $ out tax free if you manage to get all of RRSP money out in years of income levels (including RRSP) which wouldn’t attract tax – very tricky and would also be an RRSP with too much money in it.
btw do you know who publishes http://retailinvestor.org/RRSPmodel.html ? there appears to no one claiming creating the site – makes me a bit leary of anything being said.
the 15% preferential bit is in the last line of the “Profits not taxed – Ever” section.
The conceptual model, as well as the math, works no matter what % tax rates you presume for any of the inputs (the rates at contribution, withdrawal, on profits). All examples force you to chose one specific variable. The fact that all readers won’t think that particular variable applies to their situation, does not make the math wrong, or the model incorrect.
Most people’s investment profits get taxed at preferential rates. That presumption is not ‘playing fast and loose’. The preferential rate’s exact % of the statutory rate depends on the type of income, holding period for capital gains, country of origin, and tax bracket. Presuming a preferential rate = 50% of the statutory rate is a fair assumption. But you can use whatever rate you like.
Please don’t simply either accept or reject the ideas presented on my website based on ‘who I am’. Read new ideas with an open mind and be ready to change your understanding. That is the frame-of-mind I have no doubt you hope readers of your site have.
Good to hear from you Chris. I agree with your ‘open mind and be ready to change’ premise. Personal finance and investing wouldn’t be much fun if everyone thought the same!
Hi Mark,
I liked the article as I had been thinking of withdrawing RRSP $5000/ month to max $15000 …..so get less taxed. But if you can provide me an email of yours so can get more details and advice from you.
Thanks
Manoj
Hi Manoj,
My contact information is on the site but I can’t offer any direct advice unfortunately. I can only offer a take on what I would do 🙂 You are welcome to email and I could always turn your case study into a blogpost.
Mark, great post.
I’m currently in the process of melting the RRSP – way before 71 – primarily because its too big – horrible problem I know 🙂 – but we all have our crosses to bear.
I like your step by step income determination process.
FWIW both my wife and I took CPP at the earliest point possible and plan to do the same for OAS mainly because we both had a large number of “dropout” years (don’t recall correct term) – basically the longer we deferred CPP the more it impacted the CPP payment (ie. increase was deduced) – rationale for OAS is I’d rather the $ to spend now rather than later – if I make until then 🙂 .
In either case CPP/OAS do not factor greatly in retirement income plan – I always viewed (and still do) government payments as “beer money” – I could/would never depend on someone else (read government) to support me.
Pet peeve about all the “experts” that tout deferring CPP/OAS, is they never discount the future income streams – a dollar 10 years from now does not equal a current dollar but they all seem to think that way – isn’t that what spreadsheets are for?
You can ignore or delete the last 2 lines above. I guess mistakes happen when you start and stop a reply 5-6 times in a day. LOL
Good post Mark. There is not enough written or discussed about how to generate cash flow from investments in retirement, including the order of accounts to draw from. You seem to have a well thought out plan to meet your needs once you achieve your savings goals and decide to move to semi or full retirement.
As 3(me)/5(wife) year retirees our approach is:
“Buckets” for our overall cash flow to provide income and reinvestment $$. I expect a 5th bucket when govt pension(s) (CPP & OAS if available) are accessed in about 7 years or possibly even 12.
1. Work pension 2. unregistered account dividends 3. LIF minimum withdrawal 4. RRSP withdrawals 5. savings acct cash
Bucket 1 & 2 currently cover all our non discretionary spending. Bucket 3, 4 provide discretionary spending, reinvestment funds for TFSA/unregistered, pay taxes. 5 provides a significant cushion if something bad happens and it is beneficial to not touch investment accts.
Our RRSP withdrawals are made for the same 3 reasons you list above. – smooth taxes, draw cash at peak spending times of our lives, defer taking indexed govt pensions. I am in the camp of drawing down early (started age 55) and not waiting to 71. However for the time being I prefer to manually manage my own RRSP withdrawals entirely-the amounts and the timing taking into consideration taxes, market conditions, asset rebalancing, spending needs, selected withholding tax rate etc. – basically a 4th strategy to your list above. At my broker withdrawals are as simple as transferring money between accounts on line, have no cost and as many as desired can be done with 1 transaction each available per day. Therefore I see no benefit to “locking in” any or all to a RRIF …..at this stage. We’re maintaining maximum flexibility in case I want to do something to create employment income, or the market tanks and keeping RRSPs intact for a period of time outweighs benefits of tax smoothing.
You have probably explained this elsewhere, but do you not own bonds because of your DB pension?
My bucket approach is one year cash, five years bonds and the rest equities. For a million dollar portfolio that is still 70% equities using your $50,000 example and I would expect that six years is enough for markets to recover from any equity crash.
Correct Devin. Rightly or wrongly I consider my workplace pension a “big bond”.
https://www.myownadvisor.ca/got-a-defined-benefit-pension-plan-consider-yourself-lucky-then-consider-it-a-big-bond/
There is in my opinion no best mix for stocks and bonds. Everyone is different based on their risk tolerance and management style; including the ability to withstand a prolonged market decline.
I would think (although we’ll all never know for sure until it happens) that a million dollar portfolio that is still 70% equities (30% fixed income and cash) is more than safe to ride out market calamity for many years. I’ve learned for our plan, the key is not what your portfolio value is but the income you can reasonably expect from it, all the time, is most important.
We intend to try and “live off dividends and distributions” for this reason early in retirement. I’ll let you know if our plan worked!
https://www.myownadvisor.ca/why-living-off-your-dividends-or-distributions-works/
Wife and I already have over a million combined in our RRSPs at ages 47/45. She is retired early and I will be done by early 50’s so the plan is to take some money from RRSPs each year in addition to some other income streams (buy out of company equity, dividends from hold co + large non-reg portfolio). I don’t think we will ever see any OAS but we will see. Will leave TFSA’s untouched as large emergency fund. Might buy an annuity in wife’s name for simple income stream for her after I am gone.
“Wife and I already have over a million combined in our RRSPs at ages 47/45.”
Very well done. We hope to “be there” as well in the coming years Chris.
Not needing any OAS means in my opinion “you saved enough” – that’s great work on your part.
Using RRSPs/RRIFs to delay inflation adjusted pensions like CCP/OAS is part of our current strategy. We’re risk averse so we like the idea of “trading” risky retirement income like RRSP/RRIFs for more secure retirement income like government pensions.
We’ll adjust as we get closer to our actual retirement date. Adjustments will be made based on the size of our RRSP, tax implications and also status of the market. If we’re in the middle of a recession as we approach our retirement date we may choose to alter our strategy and take CCP/OAS a bit earlier to avoid drawing down our RRSPs when their value is low.
I’ve been trying to wrap my head around the CPP issue for a while now. Retiring early will cause CPP benefits to be adjusted. Applying for CPP prior to 65 will cause CPP to be adjusted. Trying to figure out the sweet spot for taking CPP, accounting for retirement age, drop out provisions and early penalty needs a CRAY computer and twelve accountants. I think I’m going to wait til I hit 59 and ask for estimates from the government.
Its true Lloyd, the CPP calculation is pretty difficult to get an exact estimate, all the various drop out rules make it difficult to calculate.
If you’re looking to get a good estimate for your CPP I would recommend reaching out to Doug at DRPensions.ca. I had a difficult question regarding the delay of CPP after age 65 and he got back to me within hours with a detailed answer. I believe he provides CPP estimates for as little as $30.
Seems smart to me Owen – but I’m biased since this is our plan: “using RRSPs/RRIFs to delay inflation adjusted pensions like CCP/OAS is part of our current strategy.”
Very well written and thought out. I’m in my 71st year so my other plan is to “marry for money”! In all seriousness, plans evolve as we age and circumstances change — health, careers etc.
Absolutely they do Gary – plans change. I think the process of planning and re-planning is a great life skill for this reason. Thanks for the chuckle.
Hi Mark,
Very informative post. I do enjoy reading your blog and it is one of the best ones out there.
I follow something similar to what you are describing above. Canadian dividend paying stocks in taxable and TFSA and US & International ETFs as well as Bonds/GIC in RRSP. We will not have any pensions so we are aiming to have 5 years of costs in fixed income by the time we retire excluding discretionary items such as travel etc. This will give us enough cashflow in case of a market downturn (hope the downturn does not last longer than 5 years). I am not sure if the 5 years is too conservative. What do you think?
In terms of withdrawal from the various accounts, I have tried the different scenarios (RRSP, TFSA, and Taxable) and the best results I get is as follows:
1) Dividends from Taxable and TFSA
2) Sell from RRSP for spending
3) Sell from RRSP and transfer to TFSA to maximize yearly contribution
4) Sell Taxable only if needed
5) Sell from TFSA (this will not happen until much later for us)
One of the reason the results are more positive with selling form RRSP first is because of the dividend tax credit. By letting the taxable account grow there will be more dividend tax credit to offset future income. We will pay a little more taxes in the first few years but will save in the long run.
Kevin
Thanks for reading Kevin. Always great to hear from folks.
Without any pension to rely on I think you’re smart to have a sizable fixed income/cash wedge. 3-5 years seems about right. I wish I could answer your question: I am not sure if the 5 years is too conservative. What do you think?
I wish I could know the future 🙂 However, I’ve learned when it comes to money management conservative is always better – meaning, have more fixed income or cash than you think you’ll need. Kinda like planning for a nice vacation. It’s nice to be able to spend a bit more on vacation because you’ve planned for it 🙂
FWIW our drawdown plans will be as follows, at least my thinking on this when we decide to eat some capital:
1) Spend and sell from RRSPs; while keeping non-reg. and TFSA captial intact = $30,000 or so per year in income from capital in non-reg. and TFSA.
2) Kill off RRSPs before (likely) taking on CPP and OAS.
3) Defer workplace pensions where we can to maximize fixed income payouts from them.
4) Sell taxable assets in 60s and 70s; keeping TFSA intact “until the end”.
5) Like you – sell from TFSA (this will not happen until much later for us) – in late-70s or 80s or so.
6) Sell home in 90s if we live that long and enjoy the shuffleboard in the seniors home!
Good point about dividend tax credit but capital gains are also a great form of taxation as well.
Cheers,
Mark
I like your idea of a cash reserve and then a well established dividend stocks portfolio. I disagree with ETFs. I do not like any kind of funds (be it mutual funds or ETFs). I have never made money with ETFs, so I do not invest in them. I trust dividend growth stocks and trading options for income instead. A cash reserve is good for times when the options income for example has a bad month. I will implement this strategy into my financial plans (as I didn’t have it). Thanks for posting this post, it was an interesting read and sparked some new ideas for my own trading/investing.
Thanks for sharing Martin. I understand those that do not invest with ETFs and those that do. We’ve personally decided that a few low-cost U.S. ETFs are good for extra diversification (and some income and capital gains) over time.
I retired at 55 (two years ago) with a modest DB pension. I have a substantial RRSP as well as a LIRRSP. I farm as hobby and it generates income but it varies. I recently (2016) started to make withdrawals from the RRSP. I did not convert to a RRIF due to the farm income to stay flexible. I don’t need the money from the withdrawals but I can get it out in the 15% tax bracket (federal) so I will. I might withdraw more as the 20.5% tax bracket is still lower than what I put it in at. Haven’t decided on that yet.
Oh I forgot to cheer for something…Go National Bank Go!!! (hopes for dividend increase announcement tomorrow)
I suspect it will happen. I will be happy too.
Done! $.02/share for the next payment. Woo Hoo!
🙂
It sounds like you have great income diversification: DB pension + RRSP + Locked-In RSP + hobby farm. Great stuff. I suspect it makes for you to start winding down your RRSP before CPP and OAS take effect. You’ll have options to defer those government benefits if you wish – options are great when it comes to money. Well done.
@Llyod – don’t tell CRA its a hobby farm otherwise expenses are not deductible 🙂 – its a full on farming endeavour always
Nice catch!
Under CRA rules I am a farmer. I use “hobby farm” for lay people rather than try to explain to them it is a very small farm.
Hi Mark,
Good thought process – the best part is that you actually have a plan. Thought you were going to mention the $2K pension tax credit available if you set up your RIF at age 65 instead of 71.
Cheers,
MG
I will be a lower income retiree so this tax credit interests me. Have you written about this Mark?
Ah yes, but I did write about that here:
https://www.myownadvisor.ca/converting-rrsp-rrif-consider/
Great point and thanks for the addition!
Mark
Excellent post!!! Im far from retirement but looking to learn as much as i can now to help my future self. Very well written and easy to understand. Go Leafs Go!!!
Smart Mat! Glad this post inspired you for further reading enjoyment 🙂
Leafs should have a good team next year. You need a goalie!