The transition to retirement can be hard enough without having to deal with a mess of individual stocks, mutual funds, and/or ETFs held across several accounts and institutions. Indeed, one of the most sophisticated moves you can make is to simplify your investment portfolio as you head into retirement.
Consider Chris and Liza, a couple in their early 60s who intend to fully retire this year. In fact, Liza (63) retired at the end of last year and Chris (62) will retire this summer. They have combined savings and investments of just under $800,000 across their RRSPs, TFSAs, a LIRA, and a small joint non-registered account. Liza also has a modest pension of $12,000 that began in January this year.
Their desired after-tax spending in retirement is about $60,000 per year. They plan to start their RRSP withdrawals next year and delay taking CPP until at least age 65. That means making some fairly aggressive RRSP withdrawals for a couple of years while they delay their government benefits.
Meanwhile, they’ll have enough income from RRSP and non-registered withdrawals to meet their spending needs, so their TFSAs will stay intact and invested for the long-term (though they no longer plan to contribute to their TFSAs annually).
Two-Fund Retirement Solution
How do they structure their investments to generate the income they need while keeping costs low and the portfolio easy to manage?
Enter the two fund solution for investing in retirement.
You know that I’m a big fan of asset allocation ETFs and believe that many investors can and should simply hold a risk appropriate all-in-one ETF in each of their investment accounts (and reach out to a fee-only advisor as needed for financial planning advice) during their working years.
Not much needs to change in retirement. That’s right – simply carve out 10-15% of your portfolio and use those funds to purchase a high interest savings ETF. Examples include:
- CI High-Interest Savings ETF (CSAV)
- Horizons High-Interest Savings ETF (CASH)
- Purpose High-Interest Savings ETF (PSA)
- Horizons Cash Maximizer ETF (HSAV)
The cash held in a high interest savings ETF should represent approximately 18-24 months in expected annual withdrawals. Note, you’d need to do this in each account type that you’d expect to withdraw from in retirement. In Chris and Liza’s case, that would include their RRSPs, Chris’s LIRA, and their non-registered investments.
Let’s take a look at the couple’s current account balances and holdings:
- RRSP – $268,000 (VBAL)
- LIRA – $121,000 (VBAL)
- TFSA – $80,000 (VGRO)
- Non-registered – $22,000 (VBAL)
- RRSP – $203,000 (XBAL)
- TFSA – $80,000 (XGRO)
- Non-registered – $22,000 (XBAL)
Chris expects to withdraw $20,000 per year from his RRSP (RRIF), $6,000 per year from his LIRA (LIF), and $6,000 per year from non-registered investments until his CPP and OAS kicks-in at 65.
Liza will draw $16,000 per year from her RRSP and $6,000 per year from non-registered investments until her government benefits kick-in at 65.
With Liza’s $12,000 pension, this covers the couple’s annual spending needs, plus taxes.
They both like the idea of the two fund retirement solution and want to queue-up their “cash bucket” this year so it’s ready for withdrawals to begin next January. They also want to be conservative, given their higher than normal first few years of withdrawals, so they opt to hold 15% in cash in their RRSPs and Chris’s LIRA, and 50% in cash in their non-registered investments.
Chris and Liza sell off units of VBAL and XBAL (respectively) so their accounts now look like this:
- RRSP – $40,200 (CASH) / $227,800 (VBAL)
- LIRA – $18,150 (CASH) / $102,850 (VBAL)
- TFSA – $80,000 (VGRO – no change)
- Non-registered – $11,000 (CASH) / $11,000 (VBAL)
- RRSP – $30,450 (PSA) / $172,550 (XBAL)
- TFSA – $80,000 (XGRO – no change)
- Non-registered – $11,000 (PSA) / $11,000 (XBAL)
The couple will also turn off automatic dividend reinvestment so that the quarterly distributions from VBAL and XBAL will now just land in the cash portion of their respective accounts (and help refill the cash bucket).
Using a RRIF and LIF for Withdrawals
They each decide to open a RRIF account and transfer the high interest savings ETF into the newly opened RRIF. Again, the goal is to queue-up next year’s withdrawals and to reduce any fees they might incur by withdrawing directly from their RRSP.
RRIF minimum mandatory withdrawals won’t begin until the calendar year after the account is opened. Chris also opens a LIF, as that’s the only way to begin withdrawals from his LIRA next year.
Fast forward to next January. Chris starts withdrawing $5,000 per quarter (January, April, July, and October) from his RRIF – literally selling off units of CASH.TO to meet his withdrawal needs. He also starts withdrawing $500 per month from his LIF account, again selling off units of CASH.TO as needed.
Liza also withdraws from her RRIF quarterly, taking $4,000 every January, April, July, and October.
The couple dips into their non-registered account to top-up spending as needed, and earmark the remaining cash for taxes the following year.
We often end up with a tangled mess of investment accounts and investment products by the time we get to retirement. It’s common to have accounts at multiple institutions, group savings plans from previous employers, and a mix of stocks and funds from dabbling in different investment strategies over time.
Fight for simplicity as you enter retirement. Consolidate accounts into one institution – ideally at the brokerage arm of your main bank, but an online broker like Questrade is fine. Consolidate your investments from a messy mix of stocks and funds to a low cost, risk appropriate, globally diversified all-in-one ETF and then carve out 10-15% of expected cash withdrawals to hold inside a high interest savings ETF.
This creates a subtly sophisticated, dare I say elegant, investing solution that you can hold throughout retirement.
As investors we face a constant barrage of information every day that triggers our urgency instinct. The urgency instinct makes us want to take immediate action in the face of a perceived imminent danger.
This instinct must have served us well in the distant past. If we thought there might be a lion in the grass, it wasn’t sensible to stop and analyze the probabilities. We needed to act quickly with the information we had.
Urgency instinct is still useful today when we need to take evasive action, but it can backfire when it comes to making complex decisions.
In his book Factfulness: Ten Reasons We’re Wrong About the World–and Why Things Are Better Than You Think, author Hans Rosling shared a painful yet important story about controlling our urgency instinct.
Working as the only doctor in Nacala, a district of more than 200,000 extremely poor people in Mozambique, Rosling diagnosed hundreds of patients with a terrible, unexplained disease that had completely paralyzed their legs within minutes of onset and, in severe cases, made them blind.
Not 100% sure the disease wasn’t contagious, Rosling met with the mayor to discuss their options. “If you think it could be contagious,” the mayor said, “then I must avoid catastrophe and stop the disease from reaching the city.”
The mayor was a man of action. He stood up and said, “Should I tell the military to set up a roadblock and stop the buses from the north?”
“Yes,” said Rosling. “I think it’s a good idea. You have to do something.”
The mayor disappeared to make some calls. The next morning, some 20 women and their youngest children were already up, waiting for the morning bus to take them to the market in Nacala to sell their goods. When they learned the bus had been cancelled, they walked down to the beach and asked the fishermen to take them by the sea route instead.
The fishermen made room for everyone in their small boats and sailed south along the coast. Tragically, nobody could swim and when the boats capsized in the waves, all of the passengers drowned.
That afternoon Rosling headed north again, past the roadblocks, to investigate the strange disease. Along the way he came across a group of people pulling bodies out of the sea. He ran down the beach to help, but it was too late. He asked one of the villagers, “Why were all these children and mothers out in those fragile boats?”
“There was no bus this morning,” he said. Several minutes later Rosling could barely understand what he had done, and 35 years later still never forgave himself.
Why did he have to say to the mayor, “You must do something?”
When we are afraid and under time pressure and thinking of worse-case scenarios, we tend to make really stupid decisions. Our ability to think analytically can be overwhelmed by an urge to make quick decisions and take immediate action.
Recognize when a decision feels urgent and remember that it rarely is. To control the urgency instinct, take small steps:
- Take a breath. When your urgency instinct is triggered, your other instincts kick in and your analysis shuts down. Ask for more time and more information. It’s rarely now or never, and it’s rarely either/or.
- Insist on the data. If something is urgent and important, it should also be measured. Beware of data that is relevant but inaccurate, or accurate but irrelevant. Only relevant and accurate data is useful.
- Beware of fortune-tellers. Any prediction about the future is uncertain. Be wary of predictions that fail to acknowledge that. Insist on a full range of scenarios, never just the best or worst case. Ask how often such predictions have been right before.
- Be wary of drastic action. Ask what the side effects will be. Ask how the idea has been tested. Step-by-step practical improvements, and evaluation of their impact, are less dramatic but usually more effective.
As investors our instincts are constantly put to the test. Like during the last quarter of 2018 – when the market bottomed out on Christmas Eve after nearly a 20% decline. Or during the onset of the pandemic, when markets crashed 34% in March 2020. Or in 2022, when stocks and bonds crashed after Russia invaded Ukraine and central banks began hiking interest rates to curb inflation.
Gloomy headlines often proclaim the worst days ever for the stock market, while market pundits almost gleefully predict more pain in the future.
Did you act on your urgency instinct and make changes to your portfolio during any of those periods? Cut your losses and move to cash? Or did you control the urge and stick to your plan?
Patient investors have always been rewarded handsomely for staying the course. Despite the volatility and some doom and gloom, a global stock portfolio would have earned an annualized return of 10.13% over the past 10 years.
“Back in Nacala in 1981, I spent several days carefully investigating the disease but less than a minute thinking about the consequences of closing the road. Urgency, fear, and a single-minded focus on the risks of a pandemic shut down my ability to think things through. In the rush to do something, I did something terrible.”
We spend years carefully crafting our investment strategy, saving diligently, and promising ourselves we’ll stick to our plan through thick and thin. But all of that planning can be wiped away when something triggers our urgency instinct and forces us to act irrationally.
Maybe you heard about an investment opportunity and had to ‘act now or lose the chance forever.’ Or, the slightest market correction triggers financial crisis flashbacks and you panic.
Relax. Take a breath. Things are almost never that urgent – especially when it comes to investing.
As the late Jack Bogle once said, “don’t just do something, stand there.”
Old Age Security (OAS) is a government program in Canada that provides a basic income to eligible seniors who have reached the age of 65. It is one of the three main pillars of Canada’s retirement income system, along with the Canada Pension Plan and personal savings.
Eligibility for OAS is based on several factors, including age, residency, and income. To receive OAS payments, you must be 65 years of age or older and have lived in Canada for at least 10 years after the age of 18.
OAS is considered taxable income. As of June 2023, the OAS maximum payments from age 65 to 74 is $691 per month ($8,292 per year), and $760.10 per month ($9,121.20 per year) for those ages 75 and older.
The amount of OAS you receive is based on how long you’ve lived in Canada after the age of 18. If you have lived in Canada for less than 40 years, you may receive a partial pension. For instance, if you lived in Canada for 35 out of the 40 eligible years you would be entitled to receive 87.5% of the OAS maximum payment (35 divided by 40).
The amount you receive may be reduced if your income exceeds a certain threshold, which is $86,912 for the income year 2023. If your income exceeds this amount, your OAS payment will be reduced by 15 cents for every dollar of income above the threshold. This OAS “recovery tax” period takes place the following year (July 2024 to June 2025).
Since July 2013, most eligible seniors are automatically enrolled to receive OAS starting at age 65. The government determines your eligibility the month after you turn 64. If eligible, you will be notified of your automatic enrolment beginning at age 65. That means, if you are still working or simply plan to defer taking your OAS benefits to age 66 to 70, you should contact Service Canada to declare your voluntary deferral.
Otherwise, to apply for OAS, you must complete an application form and provide proof of age and residency. You can apply up to 11 months before you turn 65, and you should receive your first payment within three months of your application being approved.
To apply online you’ll need a My Service Canada Account (MSCA).
In addition to OAS, there are other government programs that may be available to eligible seniors, including the Guaranteed Income Supplement, the Allowance for Spouses, and the Allowance for Survivors. These programs provide additional income to low-income seniors and their spouses or survivors.
Overall, Old Age Security is an important program that provides a basic income to eligible seniors in Canada. While the amount of OAS you receive may vary based on your income and residency, it can provide a valuable source of income in retirement. If you are approaching the age of 65, it is important to consider your eligibility for OAS and other government programs that may be available to you.
Deferring OAS to age 70
Deferring Old Age Security to age 70 is an option for Canadian seniors who have the financial capacity to do so. By delaying your OAS payments, you can increase the amount you receive each month.
For each month that you delay your OAS beyond age 65, your pension will increase by 0.6%, up to a maximum increase of 36% if you delay OAS until age 70. This means that if you delay your OAS for five years, you will receive 36% more per month than you would if you started collecting at age 65.
However, it is important to carefully consider whether delaying your OAS is the right choice for you. If you have a shorter life expectancy or if you need the money to cover your living expenses, it may be better to start collecting your OAS at age 65.
Additionally, delaying your OAS may affect your eligibility for other government programs that are based on your income. For example, if you delay your OAS and receive a higher pension at age 70, your income may be higher and you may no longer be eligible for certain programs, such as the Guaranteed Income Supplement.
Overall, delaying your OAS to age 70 is an option that can provide a higher monthly pension, but it may not be the right choice for everyone.
OAS Payment Dates 2023
The OAS payment dates for 2023 are:
- January 26, 2023
- February 22, 2023
- March 29, 2023
- April 26, 2023
- May 29, 2023
- June 27, 2023
- July 27, 2023
- August 29, 2023
- September 27, 2023
- October 27, 2023
- November 28, 2023
- December 20, 2023
Payment dates may vary depending on your payment method. If you receive your OAS payments by direct deposit, it should be deposited into your account on the payment date. If you receive your payment by cheque, it may take a few additional days to arrive by mail.
OAS is Indexed to Inflation
While Canadians can expect their CPP payments to increase annually based on the previous year’s Consumer Price Index, OAS recipients have their benefits adjusted quarterly to provide better protection against unexpected sharp increases in prices over the year.
The quarterly inflation adjustment for OAS benefits is based on the difference between the average CPI for two periods of three months each:
- the most recent three-month period for which CPI is available, and
- the last three-month period where a CPI increase led to an increase in OAS benefit amounts.
OAS payments starting in the first quarter of 2023 were indexed by 0.3%, bringing the total increase for the year to 7.0%.
OAS Payments Increase at age 75
In July 2022, the Canadian government announced an increase to the OAS pension for seniors aged 75 or older. Starting in July 2022, the OAS pension for seniors aged 75 or older was automatically and permanently increased by 10%.
If you turn 75 after July 1, 2022 you will receive the increase in the month following your 75th birthday.
The 10% increase in the maximum OAS pension rate will not affect the calculation of your Guaranteed Income Supplement (GIS).
The increase to the OAS pension for seniors aged 75 or older is in recognition of the increased costs and challenges that seniors face as they age. The government hopes that this increase will provide additional support to seniors and help them maintain a good standard of living in their later years.
OAS Clawback Threshold
The Old Age Security (OAS) clawback threshold is the income level at which your OAS payments will be reduced or “clawed back”. The OAS clawback is designed to ensure that OAS payments are targeted to those who need them the most, by reducing or eliminating payments for those with higher income levels.
The OAS clawback threshold for the income year 2023 is $86,912. This means that if your net income (which includes income from all sources, such as employment, pensions, investments, etc.) exceeds this amount, your OAS payments will be reduced by 15 cents for every dollar of income above the threshold.
For example, if your net income was $91,912 in 2023, which is $5,000 above the clawback threshold, your future OAS payments will be clawed back by $750 (15% of $5,000). This “recovery tax” period takes place from July 2024 to June 2025.
If your net income exceeds $142,124 in 2023, your OAS payments will be fully clawed-back during the OAS recovery tax period the following year (July to June).
The timing and mechanics of this is important to note.
Let’s say you applied for OAS benefits upon turning 65 in June 2023. You earned $145,000 in 2023 due to a variety of income sources, including capital gains from the sale of a rental property. You file your 2023 taxes in April 2024 and CRA determines that your taxable income that year has exceeded the OAS clawback threshold.
Meanwhile, you’ve been receiving OAS payments monthly since July 2023. You won’t get a bill to repay the approximate $8,292 you received in OAS benefits between July 2023 and June 2024. Instead, your repayment amount is deducted from your ongoing OAS payments as a recovery tax starting in July 2024.
You will receive a letter informing you of any recovery tax deductions being withheld from your OAS pension payments.
*Changes in OAS Eligibility (not happening)*
Back in 2015, the federal government led by Stephen Harper proposed changes to OAS eligibility – increasing the age of eligibility from 65 to 67. This would have gone into effect as of April 1, 2023 and be fully implemented by January, 2029.
This proposal was quickly repealed when the federal Liberal government was elected in 2015. It’s not happening, folks.
You can continue to apply for OAS benefits and receive them starting at age 65.
OAS is a complicated system but one that is critical to retirement planning for many Canadians. It’s important to understand how much OAS you can expect to receive in retirement, and when you plan to take your OAS benefits (between ages 65 to 70) to maximize your income and minimize any clawbacks.
Speaking of clawbacks, it’s also important to understand that OAS benefits are means-tested, meaning once your income rises above a certain threshold your benefits will be clawed-back by 15 cents for every dollar above that threshold. In some cases, OAS benefits may be completely clawed back.
It’s important to work with a financial planner who can help you understand how the timing of retirement, crystallizing capital gains, and withdrawing from an RRSP or RRIF can impact when you should take your OAS benefits and whether your benefits will be clawed back.
It’s also important to note the advantage of pension income splitting with a spouse (for defined benefit pension income and RRIF / LIF income at age 65 and beyond), and how this helps avoid OAS clawbacks in many cases.
OAS payments are indexed to inflation and benefits are adjusted quarterly to keep pace with inflation (versus CPP, which is adjusted annually in January).
Will you take your OAS at age 65, or do you plan on deferring OAS to age 70? Do you have strategies in place based on retirement, capital gains, RRSP/RRIF withdrawals, that will impact when you decide to take OAS?