Weekend Reading: Burning Questions Facing Retirees Edition

Weekend Reading: Burning Questions Facing Retirees Edition

Retirees face a myriad of questions as they head into the next chapter of their lives. At the top of the list is whether they have enough resources to last a lifetime. A related question is how much they can reasonably spend throughout retirement.

But retirement is more than just having a large enough pile of money to live a comfortable lifestyle. Here are some of the biggest questions facing retirees today:

Should I pay off my mortgage?

The continuous climb up the property ladder means more Canadians are carrying mortgages well into retirement. What was once a cardinal sin of retirement is now becoming more common in today’s low interest rate environment. 

It’s still a good practice to align your mortgage pay-off date with your retirement date (ideally a few years earlier so you can use thee freed-up cash flow to give your retirement savings a final boost). But there’s nothing wrong with carrying a small mortgage into retirement provided you have enough savings, and perhaps some pension income, to meet your other spending needs.

Which accounts to tap first for retirement income?

Old school retirement planning assumed that we’d defer withdrawals from our RRSPs until age 71 or 72 while spending from non-registered funds and government benefits (CPP and OAS).

That strategy is becoming less popular thanks to the Tax Free Savings Account. TFSAs are an incredible tool for retirees that allow them to build a tax-free bucket of wealth that can be used for estate planning, large one-time purchases or gifts, or to supplement retirement income without impacting taxes or means-tested government benefits.

Now we’re seeing more retirement income plans that start spending first from non-registered funds and small RRSP withdrawals while deferring CPP to age 70. Depending on the income needs, the retiree could keep contributing to their TFSA or just leave it intact until OAS and CPP benefits kick-in.

This strategy spends down the RRSP earlier, which can potentially save taxes and minimize OAS clawbacks later in retirement, while also reducing the taxes on estate. It also locks-in an enhanced benefit from deferring CPP – benefits that are indexed to inflation and paid for life. Finally, it can potentially build up a significant TFSA balance to be spent in later years or left in the estate.

Should I switch to an income-oriented investment strategy?

The idea of living off the dividends or distributions from your investments has long been romanticized. The challenge is that most of us will need to dip into our principal to meet our ongoing spending needs.

Consider Vanguard’s Retirement Income ETF (VRIF). It targets a 4% annual distribution, paid monthly, and a 5% total return. That seems like a logical place to park your retirement savings so you never run out of money.

VRIF can be an excellent investment choice inside a non-registered (taxable) account when the retiree is spending the monthly distributions. But put VRIF inside an RRSP or RRIF and you’ll quickly see the dilemma. 

RRIFs come with minimum mandatory withdrawal rates that increase over time. You’re withdrawing 5% of the balance at age 70, 5.28% at age 71, 5.40% at age 72, and so on.

 That means a retiree will need to sell off some VRIF units to meet the minimum withdrawal requirements.

Replace VRIF with any income-oriented investment strategy in your RRSP/RRIF and you have the same problem. You’ll eventually need to sell shares.

This also doesn’t touch on the idea that a portfolio concentrated in dividend stocks is less diversified and less reliable than a broadly diversified (and risk appropriate) portfolio of passive investments.

By taking a total return approach with your investments you can simply sell off ETF units as needed to generate your desired retirement income.

When to take CPP and OAS?

I’ve written at length about the risks of taking CPP at 60 and the benefits of taking CPP at 70. But it doesn’t mean you’re a fool to take CPP early. CPP is just one piece of the retirement income puzzle.

The research favours deferring CPP to age 70 if you have enough personal savings to tide you over while you wait. This may or may not apply to you.

One reader comment resonated with me when he said, “my plan is to take CPP at age 70 but that doesn’t mean the decision is set in stone. I’m going to evaluate my retirement income plan every year and determine whether or not I need it.”

There’s less incentive to defer OAS to age 70 but it’s still sensible if you’re still working past age 65 or if you have lived in Canada less than 40 years.

Otherwise, the bird in the hand approach is reasonable – taking OAS at age 65 while deferring CPP up to age 70.

When to convert to a RRIF?

You must convert your RRSP to a RRIF in the year you turn 71 and then begin withdrawals the next calendar year. But you can convert all or a portion of your RRSP into a RRIF before then. Here’s when it might make sense:

If you are between age 65 and 71 and don’t have any pension income, you could convert some of your RRSP into a RRIF and start drawing $2,000 per year from the RRIF. This strategy will allow you to claim the pension income tax credit.

Another potential advantage of converting to a RRIF earlier than 71 is that your financial institution won’t withhold tax on the minimum withdrawals. Of course, it’s still taxable income and you’ll pay your share at tax time.

This Week’s Recap:

Earlier this week I told investors that it would be ludicrous to invest in complicated model portfolios. Twitter agreed:

I also answered some basic (but common) investing questions I get from readers and clients.

The MoneySense guide to the best ETFs in Canada is out again and I was once again pleased to join the panel of judges and share my thoughts on the top ETFs for investors.

Promo of the Week:

The American Express Cobalt Card is arguably the best ‘hybrid’ rewards card in Canada. Earn 5x points on groceries, dining, and food delivery, plus 2x points on transit and gas purchases. 

New Cobalt cardholders can earn 30,000 points in their first year (2,500 points for each month in which you spend $500) plus, you can earn a welcome bonus of 15,000 points when you spend a total of $3,000 in your first 3 months.

Sign up for the Cobalt card here.

I use the Amex Cobalt card and transfer the Membership Rewards Select points to the Marriott Bonvoy rewards program.

Weekend Reading:

Our friends at Credit Card Genius share a great tip that you can convert your Air Canada Buddy Pass into 30,000 Aeroplan miles. An awesome perk since it’s unlikely we’ll get to use those Buddy Passes in the near future.

A great post by Nick Maggiulli (Of Dollars and Data) on the downsides of the FIRE lifestyle. Once you achieve it, then what?

In his latest Evidence Based Investor column, Larry Swedroe explains the risks of buying individual stocks.

Downtown Josh Brown doesn’t pull any punches when it comes to investing in SPACs, digital currencies, or non-fungible tokens:

“The grotesque spectacle of broke twenty-somethings lining up to buy a pointless digital trinket invented out of thin air by the World’s Richest Man prompted this post.”

PWL Capital’s Justin Bender shows do-it-yourself investors how to calculate their time-weighted rate of return

Here’s the accompanying video:

Michael James on Money shares an incredible roadmap for a lifelong do-it-yourself investing plan.

Could you retire on $300 a month in Mexico? Andrew Hallam takes a look at international living on the cheap.

Morgan Housel says that virtually all investing mistakes are rooted in people looking at long-term market returns and saying, “That’s nice, but can I have it all faster?

Morningstar’s Christine Benz looks at another burning question facing retirees: How much should you worry about inflation in retirement?

Here’s writer Sarah Hagi’s misadventures in trading stocks on Wealthsimple Trade.

A nice segue into William Bernstein saying that free stock trading is like giving chainsaws to toddlers:

“Pray that you don’t get really lucky, because if you get really lucky, you may convince yourself that you’re the next Warren Buffett, and then you’ll have your head handed to you when you’re dealing with much larger amounts later on.”

Indeed, as Robin Powell writes, there’s more to life than trading stocks.

Experts caution investors to lower their future expected returns based on today’s high stock valuations and low bond yields. The Monevator blog offers some suggestions for investors to focus on instead of blindly sticking 12% into your calculations and praying you get that return. 

The caring economy is the chokepoint of recovery: So, what’s the plan to value the people we know are essential to our well-being?

Morgan Housel is back with a list of five investing super powers. Ok, the fifth one is not really a super power.

Finally, a wild recap of the time when Home Capital Group almost went bankrupt, only to be saved by Warren Buffett.

Have a great Easter weekend, everyone!

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13 Comments

  1. Ritchie Rental on April 3, 2021 at 3:29 pm

    Rob, great article. Thank you.
    I do have a question:
    This doesn’t relate directly to the blog but I’m sure some retirees may have smiliar questions.
    Do you know if there are courses that you would recommend for young investors? My granddaughter is 12 and is talking about how she would like to have shares in a certain company (I won’t mention the name). It seems the perfect opportunity, when there is interest to provide that education/information. Not sure how long it will last but thought it would be good to strike when the iron is hot/

    Thank you – Ritchie

    • David S on April 5, 2021 at 6:56 am

      Richie – for your granddaughter, I recommend she look up ‘A Canadian in a T-Shirt’ on YouTube. Adrian has created an excellent series of videos that are a terrific primer for a variety of investment topics.

      • Ritchie on April 8, 2021 at 4:52 am

        Thanks David – just started to look at the vidoes and they look like a good reference. Thanks for making the suggestion.

        Ritchie

  2. Garth Sproule on April 3, 2021 at 5:07 pm

    One more advantage to RRIFing at age 65 is that this income can be split with your spouse (who does not have to be age 65 yet).

  3. Robert Donley on April 3, 2021 at 5:32 pm

    I am continually hearing the new advice re: CPP Withdrawals. From an actuarial standpoint it seems like a no brainer. The problem I have is while we call this a government benefit, it actually is a benefit that is funded by employee (you) and employer contributions. Really not a lot different than a defined contribution plan except the payouts are determined by the government. That being said it is a lot more like an anuity in that when you’re gone in most instances it is. Certainly their is a benefit to deferring but believe me the government wouldn’t be doing this if it wasn’t in their best interest. I personally don’t like the idea of deferring CPP and leaving that money to the government in the case of my early demise. Yes if you guaranteed you are going to live until 90 it makes sense, but in life their are no guarantees but of course, death, taxes and of course anything that benefits the government instead of your estate.

  4. Toby Stewart on April 3, 2021 at 6:07 pm

    Ritchie; AS a serious (after getting out of high-fee mutual funds) newbie investor myself about two years ago (even though I’m in my 8th decade), I’d highly recommend “Get Smarter About Money” as a reliable independent and easy-to-understand source of investing information for anyone of any age… including a 12 yr old who is starting to get interested in this area (and good for her!… and for you for reaching out on her behalf!).
    It is under the umbrella of the regulator — Ontario Securities Commission — so there’s no “under the table” tie-in to the money-making investment corporations or commission sales entities/brokers.
    I’ve learned a lot from it — in easy-to-digest topic ‘lessons’ — and I’ve recommended it to our own 40-somethings who are 20+ years from their own retirement.
    I doubt that you or your grand-daughter will regret — at least starting — here:
    https://www.getsmarteraboutmoney.ca/

    • Ritchie on April 8, 2021 at 4:51 am

      Toby, thanks so much. I did have a look at the site and there are loads of resources. Wish me luck!

      Ritchie

      • Toby Stewart on April 9, 2021 at 6:43 pm

        You are most welcome Ritchie … pay it forward — Bonne Chance!

  5. Nick Plagakis on April 4, 2021 at 10:57 am

    Great Weekend Reading edition! I sure hope the professors projection (from monevator) of 3 % return on equities is wrong. It’s going to be tough for young people – coupled with house prices so high.

  6. Sara on April 4, 2021 at 5:51 pm

    I calculate the principle amount required to generate income.
    At age 65 CPP = 14k pa requiring 1.4m in Capital Generating 1%
    At age 70 CPP = 20.5k (5.5k more pa) requiring 2m in capital Generating 1%
    People live longer and we have excellent healthcare

  7. David @ Filled With Money on April 6, 2021 at 8:30 pm

    It’s not just twitter who agrees, I agree as well. The more simple an investment is, the better it is. Complexity bias is real!

  8. Gin on April 7, 2021 at 5:56 pm

    Thanks for another great weekend edition. Prompts good thinking and asking of questions 🙂
    From an article Doug Runchey wrote:
    if you delay applying for your OAS, you can increase your partial pension by adding extra 40ths, or you can increase your pension by the voluntary deferral percentage, but you can’t “double-dip” and use the same period of time to count for both purposes.

    With less then 40 years of residency, does that make it worthwhile still to delay OAS?
    Am I correct in assuming that the max that will be added per year of deferring OAS is 2.5% (1/40th)
    vs
    when voluntary deferring a full OAS based on 40 years residency 7.2% (0.6% per month x 12) will be added per year?

  9. Diane on April 19, 2021 at 10:17 am

    My husband and I have been saving for retirement and so can take our CPP whenever we feel is best. I have done some number crunching and have determined, based on family history, how long we are likely to live. When my husband passes, some of his CPP comes to me. However, there is a limit to how much I can get. Originally he wanted to defer as long as possible so that I would collect more upon his death, but this was an inaccurate assumption. For us, as a couple, the most lifetime income between the 2 of us occurs when he takes CPP at 66 and I take it at 68. If you are not a number crunching type, it would be well worth getting help to do these calculations.
    Robb, thank you so much for the idea to transfer some money to a RRIF earlier and start taking $2,000 to get the offsetting tax deduction. This is brilliant! Something I have not heard of before, despite all the research I’ve done on preparing for retirement.

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