Retirement Planning, Estate Planning, Tax Planning, RRSP, TFSA

Why Personalize Your Retirement Plan

May 12, 2019

When retirement arrives, investment planning changes from creating wealth to stretching your dollars.

It’s a balancing act.

You want to sustain assets as a dependable income source, yet you also need investment growth to fund a period lasting 25 years or more. All the while, tax planning counts as you want to minimize tax on retirement income.

There’s no single solution that suits everyone.

The approach that works for you depends on a variety of factors, including your marital status, lifestyle, net worth, risk tolerance and estate plans. Here are three illustrations that show how each retiree may take a different path in retirement income planning.

Hanna and Victor

Both Hanna and Victor, recently retired, have been very conservative money managers all their lives. When retirement was on the horizon, they directed savings to non-registered fixed-income funds instead of contributing the money to their Registered Retirement Savings Plan (RRSP). It was to become a secure pool from which they’d withdraw retirement income.

Now, Hanna, who had been the primary income earner, closes her RRSP and divides assets between a Registered Retirement Income Fund (RRIF) and life annuity. The couple wants the security of covering their basic expenses for their lifetime through guaranteed annuity payments and Old Age Security (OAS) and CPP benefits.

Hanna and Victor plan to keep their conservatively invested retirement income pool throughout retirement. They’ll replenish it with withdrawals from their RRIFs and dividend-focused non-registered account. The couple also takes advantage of pension income splitting, as both Hanna’s RRIF withdrawals and annuity payments are eligible. This minimizes their tax payable and reduces OAS clawback for Hanna.

Naveen

Naveen, a widower, is very focused on the legacy he will leave his son and daughter. In fact, much of his retirement income planning revolves around estate planning. He doesn’t want to leave a large balance in his RRIF only to have his estate pay over 45% of its value in tax.

Each year Naveen withdraws an amount from his RRIF that pushes his income to the upper limit of his present tax bracket, even if the amount is more than he needs. This way, less tax is paid on these amounts than the over 45% tax his estate would end up paying if the funds remained in his RRIF.

Naveen uses part of the RRIF withdrawals to make the maximum annual contribution to his Tax-Free Savings Account (TFSA). In years when he requires additional income, he draws from his non-registered account. Ultimately, Naveen will leave his children as much as possible in his TFSA and favourably taxed non-registered account.

Mark and Kristine

Over the years, Mark and Kristine have always maximized their RRSP and TFSA contributions. They also have a substantial non-registered account evenly split between fixed income and equities to meet wealth preservation and growth objectives. Now retired, the couple follows a traditional income strategy that draws the most tax-efficient income first and leaves the least tax-efficient income to last.

Each year they withdraw only the minimum required amount from their RRIFs, as withdrawals are highly taxed as income. Mark and Kristine use their TFSAs as their first primary source of retirement income. Withdrawals from TFSAs are not taxed as income and do not affect OAS benefits.

When TFSAs are exhausted, the couple uses a Systematic Withdrawal Plan (SWP) to generate monthly income from their non-registered investments. Tax-efficient payments are a blend of interest, favourably taxed dividends and capital gains, and non-taxable return of capital. Their RRIFs – if needed – will be used next.