By Robb Engen, Boomer & Echo
Special to the Financial Independence Hub
Saving outside of my defined benefit pension plan will give me several options to consider when it comes to retirement. To me, options mean freedom, even though I’ll be faced with some tough choices. Here’s why:
According to my plan provider, I should be able to retire at 57 and receive an annual pension of roughly $64,800. That will equal approximately 55 per cent of my average salary in my top five earning years.
(Note that I contribute nearly 12 per cent of my salary toward the pension plan each year, in case anyone believes these retirement benefits were conjured out of thin air).
I’ve also built up a decent sized RRSP portfolio – over $100,000 before my 35th birthday. If left alone with no further contributions, and assuming an 8 per cent annual return, this portfolio will be worth $543,000 by the time I turn 57.
To stay in a 32 per cent tax bracket (22 per cent federal, 10 per cent provincial) I could withdraw up to $23,000 (in today’s dollars) from my RRSP to give me an annual salary of $87,800.
The RRSP Meltdown strategy
The strategy – known as an RRSP meltdown – would allow me to withdraw funds from my RRSP on my own schedule before mandatory withdrawals kick-in after age 71 that might have negative tax consequences.
Melting down the RRSP early would also allow me to defer OAS and CPP benefits to age 72 and 70, respectively, and receive a 36 and 42 per cent benefit for doing so.
That leads to my Tax-free savings account (TFSA), which is not currently funded. The plan is to start topping up my TFSA once our car payments end in 2016. But even if I haven’t completely maxed out my TFSA by the time I retire, I could start funnelling RRSP withdrawals into my TFSA to build an eventual tax-free income stream that won’t affect eligibility for OAS benefits.
I’d also like to continue writing and offering financial planning services in retirement, income that I can keep inside my small business for preferential tax treatment.
In order to make a detailed retirement plan, you’ll need to have a good understanding of your expenses as well as your desired income target.
That can be impossible to determine two decades or more in advance, which is why I’m focused on generating as many income streams as possible to give me options and freedom to choose my retirement date.