8 retirement withdrawal strategies: RRSPs, TFSAs, RRIFs, and more
We sat down with Nasser Mama, FlexiFonds mutual fund advisor, who shared his expertise.
When the time comes to retire, having a personalized withdrawal strategy can make all the difference in getting the most out of your savings. And because every retirement is unique, it's important to understand the essential details and criteria so you can develop a strategy that fits your needs.
To help you grasp the issues at play here, we spoke with Nasser Mama, FlexiFonds mutual fund advisor, who shared his 8 essential tips for establishing an efficient withdrawal plan for your retirement savings. That way you'll be well-equipped the next time you sit down with your financial planner to discuss how to unwind your RRIF.
Nasser Mama, FlexiFonds mutual fund advisor
Why establish a withdrawal plan customized for you
You worked hard all your life to save enough money to retire on. By having a withdrawal plan customized to your specific situation, you'll be sure to get the maximum benefit from your savings throughout your retirement.
It's a generally accepted fact that you'll need a retirement income of between 50% and 70% of your gross income, as your expenses will usually be lower in retirement. Of course, depending on your needs and your plans, this may not be the case at all and it could change from year to year. By working with a financial planner, you can develop a customized withdrawal plan adapted to your reality, your lifestyle and your overall financial situation. A good withdrawal plan should also take into account your marital status, as that can have an effect on some pensions or benefits. In addition, with a good planner, you'll get regular monitoring of your investments and your financial goals, letting you get the most from your savings.
01 Diversify your assets
To make sure your savings last your whole retirement, it's important to find a balance between the returns and the risks to which your investments are exposed. The idea is you should be able to continue making withdrawals and maintain your lifestyle through any fluctuations in the market. With a well-diversified portfolio, you'll be protected, no matter which way the market goes. What's more, by using savings vehicles in which returns are taxed differently, like an RRSP or TFSA, you'll have a better tax strategy which will minimize the tax you pay.
One of FlexiFonds mutual fund advisor Nasser Mama's guiding principles is to have good diversification of investments, so you never put all your eggs in one basket. He explains that, to do so, you need to really know your investor profile and your risk tolerance and to discuss them with your mutual fund advisor.
02 Think long term and review your plan every year
With the increase in life expectancy, retirement keeps getting longer and retirement projects more numerous. Taking the long view lets you plan for the future while enjoying your savings right away. By choosing to see a financial planner, he or she can help you keep your sights on your investment horizon, make sure your expenses are under control and regularly adjust your budget and your plan.
Reviewing your withdrawal plan is even more important if your plans change, if you downsize from a house to a condo, if you meet a new partner or if you give in to the snowbird's urge to fly south each winter.
03 Start with your non-registered holdings to reduce tax
Depending on the type of savings vehicle (e.g., RRSP or TFSA), the tax implications can vary widely and affect your pension or your returns differently. Every situation is unique. For some, Mama recommends withdrawing from non-registered accounts or TFSAs first, followed by RRSPs, which are taxable. In this way, you may be able to reduce the tax bill on your investments, and defer tax until later, while optimizing potential returns. In certain cases, making a minimum RRSP withdrawal can also be a good option, as explained in point 5. The important thing is to sit down with a personal finance specialist to ensure you get the best advice for your situation.
04 Determine the best time to start receiving government benefits
Government benefits are a non-negligible portion of most retirees' incomes. By choosing the time when you start receiving them, you can optimize or even reduce withdrawals you make to live on. In fact, Old Age Security (OAS) and the Quebec Pension Plan (QPP) payments increase by 0.6% and 0.7% respectively for each year you put off receiving your benefits after age 65. “It's wise to wait as long as possible after age 65 to claim your benefits, even until age 71—if circumstances permit, of course,” Mama advises.
05 Plan on making withdrawals from an RRSP over several years
An RRSP withdrawal plan spread over several years could allow you to pay less tax on the amounts withdrawn. On the other hand, making large withdrawals in the same year could bump you into a higher tax bracket. You can however reduce your tax burden by planning large withdrawals in two different tax years. The tax calculator tool offered by Quebec's Ministère des Finances can give you an idea of the tax payable. Of course, given that there are multiple factors to consider, your financial planner can be of enormous help in developing a strategy that suits your needs and maximizes the money in your pocket.
06 Finding the right time to transfer an RRSP into an RRIF
When a person reaches retirement age, an RRIF becomes the natural extension of an RRSP. That's when you convert your retirement savings plan (RRSP) into a withdrawal vehicle (RRIF) to generate retirement income. Even if you can convert your RRSP into an RRIF at any time once you are retired, you must do so by December 31 of the year you turn 71.
While there are advantages to putting off making withdrawals from your RRIF, notably greater income and lower taxes, it is mandatory to withdraw a minimum amount from your RRIF each year once your RRSP has been converted. What's more, according to Mama, it can sometimes be a disadvantage to wait too long before making withdrawals. That's why it's wise to speak with a personal finance specialist to properly assess your situation.
07 Use the complementary benefits of the RRSP and TFSA
The TFSA lets you withdraw funds without being taxed, and the withdrawals have no bearing on the amount of your pensions. Consequently, depending on your level of retirement income, it may be in your interest to wait until you're 71 to start making withdrawals from your RRSP and instead use your TFSA at the start of your retirement.
Afterwards, you can withdraw the minimum amounts from your RRSP once it's converted to an RRIF, while maximizing your pensions. Money withdrawn in this way, all of which you may not even need, can be invested and sheltered from tax in your TFSA. That's a strategy favoured by Mama for people who do not need all the income from their RRIF. He points out that it can be a good idea to invest in a TFSA for the tax shelter benefit.
08 Income splitting with your spouse
Income splitting lets part of your income get taxed at your spouse's tax rate. According to Mama, this strategy can be advantageous, but only if there's a marked disparity between your income and your spouse's. He explains that it involves allocating up to 50% of your eligible pension income, including income from a pension fund or plan, an RRSP, or an RRIF, to your spouse. In this way, a couple can benefit from the pension income tax credit once the transferring spouse turns 65.
Retirement is something that evolves with your changing plans and that needs to adapt to life's ups and downs. Your withdrawal plan needs to adapt as well. By meeting regularly with your financial planner you can review your plan and make sure that the money you withdraw from your savings satisfies both your short term needs and your long term plans. What's more, you can simulate different scenarios yourself, and see how the amounts from the QPP and the OAS vary using the Ministère des Finances calculator, so you'll be ready to discuss and better understand the different plans that may be available to you at your next meeting.
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