Peter retired in 2014 at age 60 after a nearly 40-year career with a federal crown corporation. Since then, he has enjoyed an annual income of $51,626 from a defined-benefit pension plan indexed to inflation. He started drawing Canada Pension Plan (CPP) benefits ($12,426 annually) when he turned 62 and he started receiving Old Age Security (OAS) income of $8,354 at 65.
This year, he will turn 70 and his wife, Ann, will turn 65, at which point she will retire. She currently earns an annual income of $77,000, but does not have a company pension, so the couple is concerned about what losing her income will mean for their cash flow. They have an annual expenses/spending target of $90,000 after tax, but their income will fall short of that target when Ann retires.
Ann is thinking about starting to draw both CPP and OAS at 65, which will provide an annual income of $22,394, but Peter wonders if there is more benefit in waiting, and instead convert her registered retirement savings plan (RRSP), currently worth $501,413, into registered retirement income funds (RRIFs) when she retires as opposed to waiting until 71. Ann also has a locked-in retirement income fund worth $48,182.
She may find a job working a few days a week to keep busy, but the couple don’t want to rely on any potential future income and would treat it as a bonus to help with contributions to their tax-free savings accounts (TFSAs), which are invested in a mix of cash, guaranteed investment certificates that will mature this year and bank mutual funds (current total value: $216,144). They have about $40,000 in contribution room combined.
“I will have to convert my RRSP (valued at $410,120) into a RRIF when I turn 71,” Peter said. “When I do, should I use my wife’s age to minimize the amount of money I have to withdraw and avoid any OAS clawback? Does that make sense? What are the effects of income-splitting my pension and RRIF?”
Peter and Ann are debt free and own a home valued at $500,000 in northern Ontario. They have no plans to downsize unless mobility becomes an issue. They also save up to pay for larger purchases, maintain one credit card to take advantage of the cash rebate and repay balances in full each month.
“Our finances and assets are modest and we lead a fairly simple lifestyle,” he said. “I am conservative when it comes to investing. I’d like to see some analysis that assumes returns keep pace with inflation. That would help me sleep at night.”
What the expert says
Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, believes Peter and Ann are in good financial standing when it comes to creating sustainable future cash flow.
“With almost $1 million in registered investments and over $200,000 in TFSAs, Peter and Ann can afford to retire with the budget they have outlined. Most of the income they need will come from his pension and their combined government benefits, supplemented by the RRIF income,” said Einarson, who recommends Ann convert all of her RRSP to a RRIF and take income from her RRIF, CPP and OAS at age 65.
“Even though they are conservative investors, they will be fine if the investments just keep up with inflation in the registered accounts and they don’t use the TFSAs for retirement income,” he said. “They can create almost 30 per cent more total net income than they need under this conservative scenario. With the extra income, they can afford to continue saving in the TFSAs well into their 90s.”
If Ann decides to work part time, Einarson said she can wait to take RRIF income, which can be delayed to age 71.
“Whether retiring or semi-retiring, she should stop all RRSP contributions, which are deductible at your highest marginal tax rate and so are best made in the highest-income earning years,” he said. “Her last full calendar year of employment would likely be the last year she should add to her RRSP.”
As for Peter’s RRIF, Einarson said there are no downsides to using Ann’s age if they want to take out less, since the minimum withdrawal at 65 is four per cent while the minimum withdrawal at 72 is 5.4 per cent. However, he also thinks they should consider taking out more than the minimum.
“OAS clawback starts at $90,997 of total gross taxable income for a taxpayer and is fully clawed back at $148,065 to age 75 and $153,777 after that,” he said. “They could increase total income to close to $9,000 a month, which is what I calculate is the maximum they could have from their pension and registered accounts over the next 30 years if investments only keep up with inflation.”
Einarson said people too often delay taking registered income to the point where the tax becomes an acute burden. RRIFs are also not ideal estate assets as they are fully taxable at that point, so planning for a tax-efficient income over time is key.
“This is why I don’t think they should delay RRIF income any longer,” he said.
Peter’s pension can be split up to 50 per cent and any RRIF withdrawal can be split with a spouse or common-law partner up to 50 per cent at or after age 65. Doing so means both Peter and Ann will pay an average of about 10.5 per cent in income tax if they are aiming to have an income of $7,000 net per month. If they aim for $9,000 net per month and income split, each will pay an average of 16 per cent in income tax.
“With over a million dollars invested through a major financial institution, Peter and Ann are paying fees and should insist on a detailed retirement plan,” Einarson said. “If they are not satisfied, they should consider taking their business elsewhere.”
* Names have been changed to protect privacy.
