Posted By Steps to Retire the Way you Want: Set Your Retirement Goals, Put your Money in the Right Places, and Optimize your Withdrawals
By Steve Lowrie, CFA
Special to Financial Independence Hub
Most of us feel young well into our 60s (or even later) and retirement seems like a faraway concern for the distant future. However, thinking about your retirement early allows you to comfortably enjoy your later years no matter what your priorities are – leaving a legacy for your loved ones, travelling, spending time on hobbies close to home or any combination. Putting together a retirement income plan early gives you the best path to safeguard your financial freedom post-retirement.
Retirement income planning doesn’t mean constant worrying and going without today. It just means taking stock of where you are financially, where you want to be in the future, and setting up a plan to get there. That retirement plan could include setting up the right investment strategies now to allow you the flexibility you’ll need in the future to generate cashflow from the right places and pay the least amount of tax. It also could mean contributing regularly and consistently now so you don’t have to make up for lost ground in the future.
Let’s get into what retirement investment vehicles and strategies you have, how to think about your retirement priorities and goals, and how you can plan a decumulation strategy for the retirement you want and deserve.
Your Retirement Vehicle Options
When thinking about retirement vehicle options, I like to visualize pots or buckets of money; each of those pots represent a savings vehicle from which you can withdraw retirement cash flow. Whether it’s pots or jars or briefcases filled with cash that you imagine, here are the labels you can put on them:
- Government Benefits – Canadian Pension Plan (CPP) and Old Age Security (OAS) primarily, but there are other government retirement programs that can be leveraged in lower income situations.
- Company Pension Plan – Your employer may offer pension plans in a variety of ways including Registered Pension Plan (RPP) or Defined Benefit Plan (DBP).
- RRSP – You can set up and contribute to a Registered Retirement Savings Plan (RRSP) personally or take advantage of an employer’s savings or “matching” program which is voluntary and can provide the advantage of your employer contributing to your retirement savings as well, e.g. you put in $X and your employer matches ½ of $X. Some employer retirement savings programs include Group Registered Retirement Savings Plan (Group RRSP)and Defined Contribution Pension Plan (DCP).
- TFSA – Tax Free Savings Account (TFSA) – Although contributions are not tax deductible, any income earned is tax-free when withdrawn. The purpose of a TFSA is as an investment vehicle, not to be used as a glorified saving account – read more about this in Cash is Not King: A Better Investment Strategy for Your TFSA.
- Non-Registered Investments – Unlike a registered account, there are no tax benefits when contributing, but non-registered investments allow more flexibility. Non-registered investments could come in the form of an employee share purchase plan, employee savings plan, or personal investments. Remember that investing tax efficiently is beneficial both in retirement accumulation and decumulation.
- Real Estate Equity – Your primary residence and any secondary real estate holdings (vacation home/cottage, investment/rental property, etc.) can hold a significant amount of equity for those planning to downsize in retirement.
- Insurance Policy Equity – In some cases, you can leverage equity from your life insurance policy by using the cash value or borrowing against the policy. An Insured Retirement Plan (IRP) is an option.
- Anticipated Inheritance – Although an unpleasant thought, if there is a significant amount of money you expect to receive upon a loved one’s death, an expected inheritance can be taken into account during your retirement planning process. Of course, it’s important to have conversations with your loved ones to understand their legacy plan and how it could impact your retirement. Additionally, no one can predict the future so you cannot depend on the timing of an inheritance. It’s also important to keep in mind that, even if you have a good idea of the amount of an anticipated inheritance, other factors can come into play to dwindle it down before you receive it, e.g. at-home support of poor health, long-term care, etc.
- Business Owner’s Corporation – The focus of today’s post is to provide insight into retirement vehicles that apply to most people. However, if you are a business owner, we’ve written a blog just for you: you have the additional option of leveraging your corporation for retirement savings and withdrawal.
It’s crucial to consider all of the different retirement “pots” you currently have or need set up. For couples, it’s also important to remember these options apply to both spouses which can be extremely advantageous for your retirement withdrawal plan.
Your Retirement Priorities & Goals
Once you’ve explored your retirement savings vehicle options, you’ll want to determine your priorities and define your goals.
It’s a bit of a balancing act where you might need to make some decisions to prioritize your goals. Do you:
- Maximize your retirement income and fun (lifestyle needs, travel, etc.) OR
- Leave a financial legacy for your family and loved ones OR
- Focus on charitable donations
To help you prioritize your goals, we’ve got some great blogs on this topic to get you thinking:
- Is it you … or the kids?
- Retiring reliably, leaving a legacy or balancing both?
- Accelerating Your Legacy Planning by Gifting In Advance
Remember, it doesn’t necessarily need to be one goal vs. the other. However, you may need to consider how you can achieve all your goals, perhaps by weighting their importance (my retirement fun: 60, legacy for the kids: 30, charity: 10). Or you could consider how to distribute your specific investment “pots”, for example, you may choose to spend all financial assets and leave the kids the real estate.
A few more tips to help with your retirement goal prioritization:
- Keep your retirement goals realistic – you’ll want to ensure you have the ability to reach your goals with highest probability.
- Balance your spending, savings, and withdrawals to align with goals.
- Review the location of your savings in the necessary “pots” to ensure you can meet your goals optimally.
- Focus on minimizing tax – determine the best strategy for your priorities today and tomorrow. You can pay tax now or later (estate timing) or your plan can be to smooth out your tax outlay over time. This is a key consideration when allocating your savings into your investment vehicles.
- Timing – as the old adage goes, timing is everything and I don’t mean market timing. From an investment perspective, the best approach is systematic and consistent contributions and properly planned withdrawals.
- Be flexible – the longer you have between now and retirement, the more that things can change, including your goals and financial circumstances.
Retirement Decumulation Strategies in Action
Let’s look at how people just like you can implement these retirement decumulation strategies to reach their retirement goals.
The Accumulators: Suzie and Trevor Hall (When We First Met Them)
- In their late 40s
- Still deep in their accumulation years
- Two teenage children
- Own a home, which is almost fully paid off
- Have been good about living within their means and diligently saving
- Hope to retire within 15–20 years
- Want to fully fund their children’s education
- Plan to complete home renovations before they retire
During their accumulation years, Suzie and Trevor followed advice from their independent financial advisor:
- Start with planning, not investing.
- Establish a spending plan.
- Invest systematically.
- Do a lifeboat drill.
- Remember that it’s priced in.
- Established an appropriate emergency fund and lifestyle reserve.
To find out more about the accumulation advice the Halls followed, check out:
- Real Life Investment Strategies #1: Will Geopolitics Ruin My Financial Plans?
- Real Life Investment Strategies #3: What is the Difference Between a Lifestyle Reserve and an Emergency Fund / Financial Cushion?
Suzie and Trevor also based their retirement plan on a few assumptions:
- Longevity Assumptions
- Account Management Assumptions
- Investment Allocation Assumptions
- Spending vs. Giving Assumptions
- Timing Assumptions
To read more detail about Suzie and Trevor’s financial assumptions while planning retirement, check out Real Life Investment Strategies #2: Debunking Retirement Financial “Rules”.
So, let’s explore a little about the Halls’ retirement savings vehicles:
- Trevor is a vice president at a small company that doesn’t have any company pension, group RSP, or an employee savings/share plan.
- Suzie has been an account executive at a large corporation for many years, so she has taken advantage of a myriad of employer savings offerings.
- In addition to these retirement savings pots, they will also have access to more common retirement income withdrawal options: government benefits (CPP/OAS), personal RRSPs, TFSAs, non-registered investments, equity in their primary residence when they downsize, and significant, multiple anticipated inheritances.
11 Retirement Decumulation Strategies for Suzie and Trevor
So, now that Suzie and Trevor have set themselves up for retirement success, how do they optimally decumulate once they retire at age 65?
As we know, based on their goals, they want to enjoy life and travel as a primary goal but also want to leave some money to family and charity. So, we’ll consider several factors and strategies for Suzie and Trevor’s retirement:
- When do they start collecting CPP? After careful analysis (assessing factors including life expectancy, cash flow needs, income-sensitive benefits, tax rates, etc.), Trevor and Suzie will defer CPP until 70 because they would get significantly more and would also maximize survivor benefit for surviving spouse. In the meantime, from retirement until age 70, they would instead spend down from their other pots.
- When do they start collecting OAS? We would also consider the same factors as we did for CPP. However, when it comes to OAS, the OAS pension recovery tax (better known as OAS clawbacks) are the deciding factor, so Suzie and Trevor should both start collecting OAS at age 65, as income splitting and other retirement withdrawal planning strategies means that they won’t run into the OAS clawback issue. What is the OAS clawback? If net income exceeds the threshold amount, part or all of OAS pension would need to be paid back.
- Suzie’s company pension plan – Suzie would start withdrawing from her company pension plan when she retires at 65. For tax purposes, she can income split with Trevor.
- Spousal RSP – Trevor’s higher income during their accumulation years allowed him to max out on his RRSPs annually including creating a spousal RRSP for Suzie, as their goal was to end up with the RRSPs of similar market values at retirement to allow for maximum withdrawal flexibility at retirement. This is another pool of income that could be leverage from age 65.
- Timing of conversion of RSP to RIF – RSPs must be converted to RIFs by age 71, although the first withdrawal can be deferred to age 72, which is the plan for both Trevor and Suzie. For lifestyle and tax purposes, they plan to start withdrawing funds from their RRSP accounts at age 65. Since they will have deferred their government benefits income (CPP) to age 70, RRSP withdrawals from age 65 to 71 with help with cashflow for lifestyle needs and will lower the amount of tax paid over their lifetimes. Withdrawing funds from their RRSPs will reduce the amount they need to convert to a RIF at age 71. Once an RSP is converted to a RIF, there are stringent yearly withdrawal requirements (roughly 5% of market value annually, which increases with age).
- Proper use of TFSAs – To support their lifestyle needs, Suzie and Trevor will pull out extra income from their TFSAs for their “big spending years” (i.e. their planned retirement celebration 6-week trip to Europe) without pushing their overall taxable income into higher bracket.
- Non-registered investments – Trevor and Suzie will start drawing down on their non-registered investment more aggressively early on to meet lifestyle needs and bridge to when their government benefits (CPP) kick in at age 70.
- Expected inheritance – Both sets of parents are in reasonable health, and we can estimate the approximate timing of inheritance. Both Suzie and Trevor are only children whose parents plan to leave everything to them, so the amount of these inheritances will have a material effect on the Halls’ retirement planning. This has been incorporated in their financial planning estimates and will provide them with a significant pool of non-taxable money. However, the plan around the inheritance is extremely conservative in terms of the amount and timing. They can allocate any inheritance funds towards lifestyle, investments, charity, or legacy as they see fit but their plan for this money needs to be flexible. For the Halls, the inheritance proceeds can be the primary source for leaving a legacy for both their children and charity.
- Downsizing real estate – Suzie and Trevor plan to downsize to a condominium but there won’t be substantial change in their real estate equity as a result. Their equity in real estate is a backup plan if their other investments don’t meet expectations. The equity in their home gives them an opportunity to downsize further or obtain a reverse mortgage, if needed to meet their needs.
- Well-timed charitable donations and handing down money to the kids – Suzie and Trevor want to consider when the best time is to give money to the kids (in an inheritance after they die or before so that the kids can get the money when they need it most). They’ll also want to consider the tax benefits of charitable donations and how it best applies for them.
- Conservative retirement withdrawal plan – The Halls are being conservative with their retirement withdrawal plan because they believe it’s ideal to end up better off than plan vs. finding they are too tight to achieve their goals, leaving their retirement years a disappointment.
There are even more retirement income tax strategies that might work for you. So, be sure to explore them all with your financial planner.
Leveraging Decumulations Strategies to Secure a Successful Retirement
All of these pots of retirement savings, timing and tax considerations, order of accounts withdrawals, and balancing your current financial needs with your post-retirement financial needs mean dedicated and detailed financial planning is crucial for retirement decumulation success. The two key times, age 65 and 70, each have their own withdrawal strategies and pools, so it is critical to balance taxable and non-taxable income to minimize tax. Your retirement financial plan needs to be regularly revisited and reassessed based on goals, priorities, health, new or departing family members, and other factors. Keeping these strategies in mind when planning your retirement savings decumulation will help ensure a successful and comfortable retirement.
Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog first appeared on Steve’s blog on Oct. 29, 2024 and is republished here with permission.
Disclaimer: Steve Lowrie is a Portfolio Manager with Aligned Capital Partners Inc. (“ACPI”). The opinions expressed are those of the author and not necessarily those of ACPI. This material is provided for general information, and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances. ACPI is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through ACPI or Lowrie Investments, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Lowrie Investments and are covered by the CIPF. Financial planning and insurance services are provided through Lowrie Financial Inc. Lowrie Financial Inc. is an independent company separate and distinct from ACPI/Lowrie Investments.
