You’ve spent decades building up your retirement nest egg, worrying about whether you have enough money and carefully selecting your investments to obtain the best growth. Now you need a plan to fund your lifestyle and help you get the most out of your assets going forward.
This is a time when it’s especially important to work out a budget. You need to be aware of what your fixed expenses will be, where to tweak your discretionary expenses, and determine how you will fund your leisure activities so you can set an income target.
You may have several different sources of income to work with – any or all of government and company pensions, RRSPs and TFSAs and non-registered funds. How do you establish an income plan that will be tax efficient, last your lifetime, and perhaps leave some money to your estate? Which income streams should be accessed and in what order? Which assets should be used first and which should be deferred for later use?
Related: Consider A Life Annuity
Here are a few ideas to consider when building your retirement income plan.
Canada Pension Plan
Some financial planners recommend commencing government benefits as soon as possible. Reduced benefits by (up to 36% less by 2016) can be received as early as age 60. This may seem like a penalty but you can think of it as an early enhancement to your cash flow. Why would someone consider early payments?
- 62-year-old Chuck always liked his job but lately, with all the management changes and new procedures, it has become a chore to drag himself off to work every morning. He was recently offered a position in an area that has always interested him, but it is part-time. After reviewing his budget, Chuck discovers that the part-time income will be sufficient for his regular expenses. However, he decides to apply for CPP benefits as a cushion and so as to receive extra income for any new interests he may pursue in his newfound free time.
Company Pension Plan
Whether defined benefit or defined contribution, examine your pension documents to determine when you can start receiving benefits and how much.
Some defined benefit plans offer an integrated benefits option that provides higher income earlier and reduces when government pensions are received. The combined payments have the effect of leveling the total pension income.
- Debbie is 58 years old and has worked at the same company for most of her working life. She wants to spend more time with her grandchildren and be available to her ailing mother. She receives a higher amount of income from her company pension for two years. When she starts receiving CPP benefits at age 60 and OAS at age 65 the employer pension reduces by roughly the same dollar amount, keeping her pension payments equal.
Advisors usually recommend accessing non-registered funds first in order to allow registered plans to increase on a tax deferred basis for as long as possible. The theory has always been that income in retirement will be substantially lower than when a person is employed. This is not always the case. RRSP/RRIF withdrawals are fully taxed at the highest marginal rate and may lead to clawback of OAS and reduction of other benefits.
- Roger has diligently saved his maximum RRSP contribution and has invested wisely. He now has substantial RRSP holdings. He calculates that if he receives his CPP/OAS benefits and his two separate generous company pension amounts, the minimum withdrawal from his RRIF will put him at a higher tax bracket than when he was employed. Roger worked with his financial advisor to structure all his retirement payments in such a way as to reduce his tax liability while still providing sufficient income.
Make your plan work for you
There is no one right way to structure an income plan because there are too many variables. Income requirements in retirement will depend on your age and your spouse’s age, whether you will continue some sort of employment, your health, the amount of pension income you can expect from various sources and how much you have saved.
Everyone’s situation is unique. You need to take all the different forms of income and the assets you have accumulated and put it all together.
It’s important to develop a plan custom designed to assist you in achieving all the things you wish to do in retirement.