Why Options Mean Freedom When It Comes To Retirement

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:

Related: Why I save outside my defined benefit pension plan

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 percent of my average salary in my top-5 earning years.

(Note that I contribute nearly 12 percent of my salary towards the plan each year, lest anyone think these retirement benefits are 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 percent annual return, this portfolio will be worth $543,000 by the time I turn 57.

To stay in a 32 percent tax bracket (22 percent federal, 10 percent 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 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.

Related: How I plan to be financially free by 40

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 percent 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 payment ends 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.

Related: How we use dividends to split income and save taxes

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.

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  1. NelsonG on August 3, 2014 at 2:42 pm

    Interesting post. Being a late comer when it comes to saving and investing, I wonder if I still have enough years to catch up to even just half of what you have going. As for OAS and CPP benefits, I will only get a fraction of what somebody born in Canada gets.

    • Echo on August 3, 2014 at 4:39 pm

      Hi Nelson, it’s amazing how savings can snowball over time once you start paying yourself first. You’ve got a lot going for you because you have no debt and your expenses are low. You’re able to save 25% of your income. That’s going to make a big difference in the next decade or two. You still have plenty of time.

  2. Unhappy on August 4, 2014 at 5:07 am

    Wow, nice defined benefit plan. Contributing only 12% of your income and you get such a huge pension. Wish it were possible to do that in RRSPs (we’ve contributed way more than that for many decades to get much less).

    • Echo on August 4, 2014 at 8:04 am

      @Unhappy – Well, to be fair, my employer matches the contributions. Without knowing my salary (or yours) 12 percent doesn’t tell you much. It could be $1000 a month, or $500 a month.

      I have the value of the pension pegged at about $1.1M, which is certainly achievable in an RRSP – saving $12,000 per year for 27 years at 8 percent annual growth – but you’d have to take considerably more risk to get the 8 percent return.

      • Unhappy on August 4, 2014 at 9:36 am

        $1.1 million saved should only give you $44,000/year (using the safe 4% withdrawal rule). Mind you, with an RRSP, you still have value when you die (assuming you haven’t spent it all). That’s a plus.

        • Rob CFP on August 4, 2014 at 10:17 am

          You have to remember that a pension doesn’t have a “residual” so the 4% withdrawal doesn’t impact it. Pension payments are basically just an annuity that includes a return of capital.

          • Unhappy on August 4, 2014 at 11:44 am

            I realize that. It’s just that the OP says that’s going to be the value of his pension. It’s different if it’s an RRSP. You’d need a lot more money to give you $65k/year in an RRSP.

          • Rob CFP on August 6, 2014 at 10:50 am

            If you purchase an annuity with the funds from your RRSP you’ve effectively just bought a pension – assuming the same assumptions, you’d need the same amount of money.

  3. ljh on August 4, 2014 at 9:15 am

    Nice future. My question is: Can RRSP money be transfered in kind to the TFSA? I ask this because my spouse who is 68 has all his RRSP in American stocks and would not like to lose the potential increase in value over time. Also, if this cannot be done what would you suggest in order to minimize the taxes and its effect on OAS before mandatory RRIF at 71?

    • Echo on August 4, 2014 at 12:54 pm

      @ljh – You can do it by transferring your RRSP to a non-registered account (the amount withdrawn will be added to your income for the year and your bank will withhold tax – 30 percent for withdrawals of more than $30k). From there, you can transfer the shares from your non-registered portfolio into your TFSA.

      If anyone has done this recently please comment if there is a more straightforward process.

      Also, note that U.S. dividends are subject to a 15% withholding tax inside your TFSA

      • Get in the game on August 4, 2014 at 8:12 pm

        What happens down the road with the %15 held tax from American dividends?

  4. My Own Advisor on August 4, 2014 at 7:03 pm

    That’s a great pension in another 20 years or so!

    Between the pension and RRSP growing, and the side income streams, you’re going to be in a great place Robb.


  5. Tawcan on August 4, 2014 at 10:58 pm

    Great pension you have. The RRSP meltdown idea sounds interesting, it’d mean I’m not forced to do something I don’t want to. Will have to investigate further. Thanks for the info!

  6. Jordan on August 5, 2014 at 10:44 am

    I was wondering, if you have thought about the end of the line and tax implications associated with RRSP’s and your pension; particularly, the impacts on OAS and GIS. I haven’t done the calculations myself yet but considering that we are in similar situations I wonder what your thoughts are and the max amount one should have in their RRSP’s in this situation? It seems to me that (guessing) that the TFSA’s are a better option for maximum benefit but would like to know the numbers. Thoughts?

    • Echo on August 5, 2014 at 11:09 am

      Hi Jordan, that’s why I’d like to withdraw from my RRSP before it starts to impact OAS.

      Yes, the TFSA looks like the better option in retirement, however you can’t ignore the benefits of contributing to your RRSP today. A dollar saved today is worth more than a dollar saved in the future.

      • Jordan on August 5, 2014 at 11:25 am

        You are right and I am on the same page as you. I think my question remains, where is the point at which you have contributed to your RRSP’s to where the benefits are having consequences on income vehicles. This is the question that I think almost everyone with a DB pension should be asking themselves. Do you know yours?

        • Echo on August 5, 2014 at 11:32 am

          Unfortunately, I don’t know the answer. I built up most of my RRSP before moving into the public sector, so now it’s just something I need to deal with. Retirement is at least two decades away, so the plan I’ve outlined in this post is sufficient for now until I get closer to the date.

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