Tag Archives: retirement income

Our early withdrawal strategies: How to keep more money

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By Bob Lai, Tawcan

Special to the Financial Independence Hub

As many of you know, we have been busy adding new capital and buying dividend paying stocks over the last few years. During the COVID-19-caused short recession last year, our portfolio was down as much as $250,000. We didn’t panic and liquidate our portfolio. Instead, we saw the recession as an opportunity to buy discounted stocks and we added $115k to our dividend portfolio.

I’m a believer in time in the market, rather than timing the market. Therefore, we try to be fully invested in the stock market as much as we can. We use our monthly savings to add new shares and take advantage of any downturns. We also strategically move any long term savings for spending account to buy dividend paying stocks whenever there are enticing buying opportunities. We then “put back” money in the LTSS account over time.

Although we are in the accumulation phase of our financial independence retire early journey, I have done a few calculations and scenarios to plan out our early withdrawal strategies and plans. But they are what the names suggested – strategies and plans. Nothing is written in stone and things can certainly change by the time we decide to live off our dividend portfolio.

Recently Mark from My Own Advisor appeared on Explore FI Canada to discuss FI Drawdown Strategies. Since Mark is a few years ahead on the FIRE journey than us, or FIWOOT (Financial Independence Working on Own Terms) as Mark calls it, it was great to hear about what Mark is thinking and the considerations he has.

Speaking of living off dividends and early withdrawal strategies, it was really awesome to be able to pick on Reader B’s brain on this topic:

After listening to the Explore FI Canada episode, I thought about our early withdrawal strategies. Are there effective ways to minimize taxes so we get to keep more money in our pocket?

For Canadians, we can receive CPP and OAS when at age 65. I have not included CPP and OAS in our FIRE number calculation because I always considered them as the extra income and didn’t want to rely on them during retirement. Having said that, are there things we can do to receive the full CPP and OAS amounts without clawbacks?

A few things to note before I go any further…

  1. We plan to live off dividends and only sell our principal if we absolutely have to.
  2. We plan to pass down our portfolio to our kids, future generations, and leave a lasting legacy.
  3. Ideally it’d be great to be able to pass down our portfolio to future generations. But we also don’t want them to take money for granted. Therefore, we are also not against the idea of not passing anything to future generations.
  4. I’d love to write a million dollar cheque and donate it to a charity.

Our Investment Accounts

Our dividend portfolio comprises the following accounts:

  • 2x RRSP
  • 2x TFSA
  • 2x taxable accounts

I also have an RRSP account through work. Every year I have been moving my contribution portion to my self-directed RRSP at Questrade. I can’t touch my employer’s contribution portion until I leave the company.

Neither Mrs. T nor I have work pensions so that may make the math slightly simpler.

The only complication I need to consider is what to do with income from this blog. This blog now makes a small amount of money. For tax efficiency, it might make sense to consider incorporating. Many bloggers I know have gone down this route for tax efficiency reasons. This is something I will have to consult with a tax specialist in the near future and crunch out some numbers to see what makes the most sense.

Shortcomings of RRSP

As the name suggests, the RRSP is a great retirement savings vehicle. But there are three important caveats people often skim over:

  1. RRSPs must be matured by December 31 of the year you turn 71. You can convert an RRSP into a RRIF or purchase an annuity. Most people convert their RRPs into RRIFs.
  2. A RRIF has a mandatory minimum withdrawal rate each year.
  3. The minimum withdrawal rate increases each year (5.4% at age 72 and jumps to 6.82% at age 80).
  4. RRSP and RRIF withdrawals are counted as normal income and taxed at your marginal tax rate.

Personally, I don’t like the restrictive nature of the RRIF. Imagine having $500,000 in your RRIF and having to withdraw a minimum of $27,000 at 72. If your RRSP/RRIF has a bigger value, it means you are forced to make a bigger withdrawal!

By plugging the amount currently in our RRSPs into a simple RRSP compound calculator, assuming no more contributions and an annualized return of 7%, I discovered that we’d end up with more than $2M in each of our RRSP!

Holy moly!

At 5.4% minimum withdrawal rate, that means we’d have to withdraw at least $108,0000 each. This would then put both of us into the third federal tax bracket. More importantly, we’d get hit with OAS clawback (more on that shortly).

Therefore, it makes sense for Mrs. T and me to consider early RRSP withdrawals and perhaps consider collapsing our RRSP before we turn 71.

CPP Clawbacks

Contrary to many Canadian beliefs, there are no clawbacks for CPP.

You pay into the Canada Pension Plan (CPP) with your paycheques. Each year that you contribute to the CPP will increase your retirement income. Therefore, the amount of CPP you will receive at 65 depends on your contributions during your working life.

In 2021, the maximum CPP benefit at age 65 is $14,445.00 annually or $1203.75 monthly. The CPP benefit is taxed at your marginal tax rate.

But not everyone will get the maximum CPP amount since it is based on how long and how much you pay into the CPP.

  • You must contribute to CPP for at least 83% of the CPP eligible contribution time to get the maximum benefit. You are eligible to contribute to CPP from 18 to 65, so 83% would mean you need to contribute to CPP for at least 39 years.
  • In addition, you also need to contribute CPP’s yearly maximum pensionable earnings (YMPE) for 39 years to qualify for the maximum CPP amount. For 2021, the YMPE is $61,600.

Not many people can meet these two requirements, hence the average CPP payment received in 2020 was $689.17 per month or $8,270.04 annually.

Since we plan to “retire early” eventually, it’s unlikely that we will qualify for the maximum CPP benefits.

OAS Clawbacks

Unlike the CPP, there are clawbacks or a pension recovery tax for OAS. If your income is over a certain level, the OAS payments are reduced by 15% for every dollar of net income above the threshold. In 2021, the OAS clawback threshold starts at $79,845 and maxes at $129,260. So, if you’re making over $79,845, you will receive reduced OAS payments. And if you’re lucky enough to have a retirement income of over $129,260, you get $0 OAS payments. Continue Reading…

Why you should (or shouldn’t) defer OAS to Age 70

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I’ve long advocated that anyone who expects to live a long life should consider deferring their Canada Pension Plan to age 70. Doing so can increase your CPP payments by nearly 50% – an income stream that is both inflation-protected and payable for life. If taking CPP at 70 is such a good idea, why not also defer OAS to age 70?

Many people are unaware of the option to defer taking OAS benefits up to age 70. This measure was introduced for those who retired on or after July 1, 2013 – so it is still relatively new. Similar to deferring CPP, the start date for your OAS pension can be deferred up to five years with the pension payable increased by 0.6% for each month that the pension is deferred.

OAS Eligibility

By the way, unlike CPP there is no complicated formula to determine your eligibility and payment amount. That’s because OAS benefits are paid for out of general tax revenues of the Government of Canada. You do not pay into it directly. In fact, you can receive OAS even if you’ve never worked or if you are still working.

Simply put, you may qualify for a full OAS pension if you resided in Canada for at least 40 years after turning 18 (when you turn 65).

To be eligible for any OAS benefits you must:

  • be 65 years old or older
  • be a Canadian citizen or a legal resident at the time your OAS pension application is approved, and
  • have resided in Canada for at least 10 years since the age of 18

You can apply for Old Age Security up to 11 months before you want your OAS pension to start.

Your deferred OAS pension will start on the date you indicate in writing on your Application for the Old Age Security Pension and the Guaranteed Income Supplement.

There is no financial advantage to defer your OAS pension after age 70. In fact, you risk losing benefits. If you’re over the age of 70 and not collecting OAS benefits make sure to apply for OAS right away.

Here are three reasons why you should defer OAS to age 70:

1). Enhanced Benefit – Defer OAS to 70 and get up to 36% more!

The standard age to take your OAS pension is 65. Unlike CPP, there is no option to take OAS early, such as at age 60. But you can defer it up to 60 months (five years) in exchange for an enhanced benefit.

Deferring OAS to age 70 can be a wise decision. You’ll receive 7.2% more each year that you delay taking OAS (up to a maximum of 36% more if you take OAS at age 70). Note that there is no incentive to delay taking OAS after age 70.

Here’s an example. The maximum monthly payment one can receive at age 65 (as of July 2021) is $626.49. Expressed in annual terms, that equals $7,553.88.

Let’s look at the impact of deferring OAS to age 70. Benefits will increase by 0.6% for each month of deferral, so by age 70 we’ll see a total increase of 36%. That brings our annual OAS pension to $10,273 – an increase of $2,719 per year for your lifetime (indexed to inflation).

2). Avoid / Reduce OAS Clawback

In my experience working with clients in my fee-only practice, retirees are loath to give up any of their OAS benefits due to OAS clawbacks. That means designing retirement income and withdrawal strategies specifically to avoid or reduce the OAS clawback.

The Canada Revenue Agency (CRA) calls this OAS clawback an OAS pension recovery tax. If your income exceeds $79,845 (2021) then you are required to pay back some or all of the OAS pension you receive from July 2022 to June 2023. For every dollar of income above the threshold, your OAS pension is reduced by 15 cents. OAS is fully clawed back when income exceeds $129,581 (2021).

So, does deferring OAS help avoid or reduce the OAS clawback? In many cases, yes.

One example I’ve come across many times is when a client works beyond their 65th birthday. In this case, they may want to postpone OAS simply because they’re still working and don’t need the income. In some cases, the additional income received from OAS would be partially or completely clawed back due to a high income. Deferring OAS to at least the next calendar year when you’re in a lower tax bracket makes a lot of sense.

Aaron Hector, financial consultant at Doherty & Bryant, says there is a clear advantage to postponing OAS if someone expects their retirement income to push them into the OAS clawback zone.

“Not only will postponement provide them with an enhanced OAS income, it will also in turn provide them with a higher clawback ceiling,” said Mr. Hector.

It might also allow the opportunity to draw down RRSP/RRIF assets between 65 and 70 which would reduce future expected retirement income (lower RRSP/RRIF assets = lower mandatory withdrawals between age 72 and death).

One could also stash any unspent RRSP/RRIF withdrawals into their TFSA. Growing their TFSA in retirement gives retirees the valuable ability to withdraw money tax-free any time and not have that income affect their means-tested benefits (such as OAS).

3). Take OAS at 70 to protect against Longevity Risk

It’s counterintuitive to defer taking pensions such as CPP and OAS (even with an enhanced benefit for waiting) because it forces retirees to tap into their personal savings – depleting their nest egg earlier and faster than they’d prefer. Indeed, people are reluctant to spend their capital.

New Decumulation option on the horizon in Canada

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By Andrew Gillies

Special to the Financial Independence Hub

Employees with a workplace pension plan are part of a lucky minority. In the Canadian private sector, less than 25% of workers currently have an employer pension plan.  Most often, the plan offered is a Defined Contribution (DC) arrangement.

DC plans are appealing to employers because they pose few legal or financial risks. Within a typical DC scenario, both the employee and employer contribute money into the employee’s individual account. Come retirement, the onus is on the employee to figure out how to convert these pension savings into steady income.

Decumulation game not easy to win

The name of this game is “Decumulation.”  It’s not an easy game to win. Retirees of DC plans are at risk of burning through their savings too quickly, leaving them without sufficient income in their later years. Conversely, financially conservative retirees may spend too little of their pension savings at the expense of a comfortable retirement.

One foolproof decumulation option DC retirees have is to buy an annuity from an insurance company. An insured annuity is a financial product that retirees can transfer some or all of their pension savings to in order to receive regular, guaranteed payments until death. The downside? This guarantee doesn’t come cheap. The average retiree who purchases an insured annuity can expect to forfeit as much as 20-30% of their pension savings to pay for the promise of predictable lifetime income with no future upside.

More affordable lifetime annuities

Fortunately, a new more affordable type of lifetime annuity will soon be offered through registered DC plans in Canada, and it’s a game changer. The Variable Payment Life Annuity (VPLA) was recently proclaimed into law and is poised to provide an excellent decumulation option for members of registered DC pension plans.

Within a VPLA framework, investment and mortality risks are pooled amongst many retirees, rather than insured at the individual level. This cooperative approach makes the VPLA significantly less expensive, while still delivering reasonably predictable lifetime retirement income.

The trade off, of course, is the “variable” element of the VPLA as payments may fluctuate due to market volatility or mortality experience within the pool. Still, without an insurance company taking large profits, a VPLA will generally pay out a monthly pension substantially greater (20-30% greater) than a traditional insured annuity while retaining future upside potential. Continue Reading…

Is everyone thinking of Retiring?

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By Dale Roberts, Cutthecrap investing

Special to the Financial Independence Hub

It’s just a coincidence perhaps. But much of my blog and reads for the week research landed on that retirement theme. Everyone’s thinking of retiring or writing about retirement. And why not? That is a big end goal for most of us; some form of financial freedom. This Sunday Reads post offers a nice slice of retirement thinking, from the emotional to the money side of things. And of course, there’s some non-retirement ‘stuff’ in here as well.

This is a very good topic and post on My Own Advisor – the emotional side of retirement. In fact on this site I wrote an article that offered that waiting for your spouse was the hardest part of retirement.

Mark offers up on that period after the retirement honeymoon stage (after year one) …

At this point in retirement, the honeymoon is over and potentially it isn’t as enjoyable for some as they may thought.

Maybe some folks go back to work – as part of FIWOOT [Financial Independence: Work on own Terms]. There are only so many rounds of golf you can play …

I’ve read feelings of disenchantment can set in for some. Even depression. That’s certainly something I wish to avoid. By maintaining some form of work into my routine (may or may not be daily), it is my hope that I can stay active (socially, physically, cognitively) to support my health in early retirement and far beyond.

We certainly have to take greater care when we design our life in retirement. We need to be busy and we have to have purpose – from my life experience and from many studies. Having the money to retire in some form is just the half of it, or less.

The waiting is the hardest part

In my post link above, I touched on my first taste of semi-retirement experienced alone. My wife still works and will likely work for a a few more years. I also took off down east to be with my daughter as I launched this blog …

That said, I got a good taste of that ‘waiting’. And as Tom Petty (RIP) sang ‘The Waiting Is The Hardest Part’. While I have a very generous amount of loner in me I was surprised at how uncomfortable a feeling that was – that working alone and being alone for many hours on end. I couldn’t wait for my daughter to finish work and head up to the cottage for dinner and a walk along the beach.

I may have got a taste of what if feels like to make that transition.

The Boomers Retire

On the retirement front Jonathan Chevreau takes a look at a new edition of The Boomers Retire. The book is co-authored by Alexandra Macqueen, a Certified Financial Planner who co-authored Pensionize Your Nest Egg with famed finance professor Moshe Milvesky. David Field is an investment advisor and financial planner and co-creator of the CPP Calculator.

From Jonathan’s post on MoneySense …

“That’s just responding to the reality of retirement income planning for the growing numbers of the ‘pensionless’,” Macqueen says. “If you don’t have lifetime income, you’ll need to create it or take your chances. Whatever you decide, here’s a collection of the relevant facts, principles and issues you’ll need to take into consideration when you’re making your plan.”

While the book is written for advisors and planners, it is also a good read for the rest of us offers Jon.

Of course Alexandra is no stranger to this site. A retirement and pension expert Alexandra penned one of the most read (and most important) posts on this site.

Must read: Defined benefit pension planning. Bad advice could cost you your retirement.

And the Maple Money Podcast is on point this week as well with how to design your retirement lifestyle, with Mike Drak. Mr. Drak is a co-author of retirement heaven or hell, which will you choose? Continue Reading…

Q&A on VRIF: Vanguard’s new Retirement Income ETF Portfolio

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Vanguard Canada

Special to the Financial Independence Hub

Republished with permission of Vanguard Canada

Late last year we launched a new all-in-one ETF solution, VRIF, to complement our existing line up of popular asset allocation ETFs.

VRIF, or the Vanguard Retirement Income ETF Portfolio, provides steady and predictable income to help investors meet their monthly expenses. It is made up of eight underlying Canadian Vanguard ETFs and will make an annual payout (currently 4% of the portfolio) split across equal payments each month.

The product has generated interest from investors and advisors along with several industry observers helping it become one of our top selling ETFs over the past few months and generating $150 million in assets (as of February 8, 2021).

It has also led to some questions on how it works and what it hopes to achieve. I wanted to collect some of those common questions and provide a few answers about VRIF.

1) What makes VRIF different from other similar monthly income funds and ETFs?

VRIF is unique in a few different ways. It incorporates a total return approach, meaning the portfolio is constructed to ensure it can help meet the daily living expenses of investors. There is an annual payout (currently 4% of the portfolio) split across equal payments each month. This is appropriate for investors and retirees looking for regular income as well as helping RRIF account withdrawals. For example, if you hold $30,000 in VRIF at the start of the year, that equates to $100 a month, for $1,200 over the year.

You also get a fully diversified portfolio with a mix of stocks and bonds, global diversification and a low-cost management fee of 0.29%*, which is currently about one-third of other similar retirement income products across the industry.

Another advantage to VRIF is that investors can rely on Vanguard’s global investment experts to monitor and assess the portfolio to meet the return target, along with providing regular rebalancing to help simplify the monthly income component. It really is a single ticket solution for investors to access monthly income.

* The management fee is equal to the fee paid by the ETF to Vanguard Investments Canada Inc. and does not include applicable taxes or other fees and expenses of the ETF.

2) How can VRIF help retirees and investors looking for income?

Managing income in retirement is not an easy task. There are a lot of ETFs and mutual funds for building up your retirement savings but not many for people who are looking to use those savings for their retirement spending.

With 30% of Canada’s population being 55 or older, the need for income has never been greater among investors. VRIF gives you a regular consistent payout each month (currently 4% of the total portfolio) and readjusts it once per year. Each year we set a dollar amount and it’s the same for every month in that year. The outcome is a simple and low-cost investment option that can help people enjoy their retirement.

3) How does VRIF expect to achieve the annual payout for investors given the current low-yield environment and where does that payout come from?

Within VRIF, we use a well-diversified total return approach to achieve a tax-friendly annual payout, (currently 4% of the portfolio) split across equal payments each month, that includes income from the portfolio and capital appreciation. Continue Reading…