Part of the circle of life is the inevitability of retirement. Albeit, these days, 2 of 3 people prefer to remain working past 65 but at a reduced rate. In either case, the sources of your income will change, and it is a fairly complex set of calculations. Know that, when the time comes for you, we will begin the conversations early so you can see how it will all work.

While you are working, your income comes from one source, your employer. Pretty simple. They deduct the tax, pay for the health, dental and pension plan, if there is one, and that’s about it. At retirement you will have many sources of income. CPP, OAS, your RRIF (which comes from your RRSP), your TFSA, possibly your pension plan and finally any non-registered savings. The goal is to set the process in place that provides enough money to cover your expenses while balancing tax efficiency with flexibility. Let’s look at each of the potential sources.

Canadian Pension Plan (CPP)

Currently the maximum benefit at age 65 is $1,364.60 per month. To claim that amount you would have had to contribute for 39 years between the ages of 18 and 65 and maximize your contributions for most of those years by earning the maximum pensionable earning amount. You can take it as early as age 60 but we don’t recommend it because the benefit is severely reduced. The longer you wait to start withdrawing, the greater the benefit up to the age of 70.

Old Age Security (OAS)

Every Canadian resident is eligible, sort of. The current benefit at 65 would be $713.34 but there’s a catch. If your income is greater than $81,761, part or all of it is “clawed back” by the government. Before you turn 65 you will start getting notices asking what you would like to do. If you’re still working and receiving an income, best to decline OAS. If not, it depends on your income from all sources.

You can read more about the minimum income recovery threshold here.

Registered Retirement Savings Plan (RRSP)

Again, if you intend to continue working full time or part time and you continue to have an income, it’s best to leave it and continue adding to the RRSP until your income stops. You can do that up to the age of 71 at which time you must convert to a RRIF.

Registered Retirement Income Fund (RRIF)

In the year you open your RRIF account, there is no minimum withdrawal requirement, but in the following calendar year you must start withdrawing from your account annually and this withdrawal is added to your income for the year.

The required minimum withdrawal is calculated at the beginning of every calendar year and is based on your account’s market value and a prescribed percentage factor depending on your age (as the annuitant) or your spouse or common-law partner’s age (if elected at the time the plan was set up).

If you have a younger spouse or common-law partner and your aim is to minimize withdrawal amounts, you can use your spouse’s age to calculate your minimum requirement.

You can withdraw more than the minimum if your expenses require it.

Tax-Free Savings Account (TFSA)

This one is the free lunch. You don’t get a tax deduction when you contribute but at the other end you can make withdrawals of any amount tax free. There is no age limit on making contributions to a TFSA and what we recommend for most is to use some of their RRIF income to continue building their TFSA.  This account is really the only accessible tax relief for someone over the age of 71.

Pension Plan

If you have one, you are in a small minority. According to Statistics Canada in 2022, only 17% of Canadians are in a pension of any kind. Of those, two thirds are in defined benefit plans and even then in the defined benefit plans, three quarters are in public sector plans like Teachers or the Hospitals Of Ontario Pension, HOOP.  So, chances are, you aren’t in a pension plan, but if you were, they will send you an “Election of Benefits” form at retirement that asks what you want to do.  If you need to decipher the options, call us.

Non-Registered Savings

Like a bank account, you can use these assets for day-to-day operations and there is no tax consequence to using your own money if it’s just sitting in a bank account. If the non-registered assets are in investments such as stocks or ETFs there may be a tax consequence if you sell them to generate cash. The key here is to build and have a plan. It’s way too easy to just take money out of this account and spend (waste) it if you don’t have a plan.

Insurance

This can be through a policy loan off a whole life insurance policy or using the cash surrender value from a permanent policy or from an annuity. Each source of income from an insurance product has different tax consequences and should be carefully discussed with your insurance advisor before proceeding.

Real Estate

Typically meaning your house. For most Canadians, their house is their biggest asset and the only form of forced savings. It is also their biggest asset which they have used a huge amount of leverage to invest in. Typically, this is the last financial asset that gets deployed. It is by far the cheapest and most agreeable thing to do to remain in your house as long as you can. BUT, there comes a time when every one needs care and can no longer manage a big piece of real estate. The house is the asset that can then be sold to provide the necessary income to pay for assisted living, which, as we know is expensive.

Adding to the Complexity: Tax Efficiency vs. Flexibility

One of the biggest challenges of all these cash flows is balancing the tax efficiency with flexibility.  They are in direct conflict.  The most tax efficient option is to withdraw from your non-registered and TFSA accounts first.  However, these accounts offer you a source of funds fairly tax efficiently when/if you need a lump sum of money.  If all of your income is RRIF/pension income, your options for tax efficient cash is VERY limited.

In Summary

Retirement income planning is complex and everyone’s situation is different. When the time comes, or better yet, before the time comes, we are happy to sit with you to map out how it’s going to work for you and your family into the future. If you have any questions or would like to learn more about any of the above, just let us know.