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Retirement: Our advice for planning your withdrawal strategy

10 September 2020 by National Bank
How are retirement withdrawals calculated

There are many advantages to establishing a retirement withdrawal strategy. When the time comes to use your savings when you retire, there are many ways you can go, but they’re not always simple to understand. Here’s an overview through six questions answered by an expert.

Why do you need a retirement withdrawal strategy?

With life expectancy increasing, people are also enjoying a longer retirement. That’s one of the reasons that should push you to set up a good withdrawal strategy so you can enjoy your retirement to the fullest. “A withdrawal strategy for your assets will prevent your retirement income from wasting away, all while ensuring that you’re also paying as little tax as possible,” asserts Mohamed Wakkak, Financial Planner and Senior Advisor at National Bank.

Some retirees dip into their savings every month without thinking about tax regulations and laws. “Having a withdrawal plan ensures that you are getting the most out of your savings and investments.”

What can be withdrawn and in what order?

Depending on your financial situation and your work conditions, you could end up with a very long list of savings vehicles from which to withdraw once you’re retired:

  • Non-registered savings account
  • Tax-free savings account (TFSA)
  • Registered retirement savings plan (RRSP)
  • Locked-in RRSPs
  • Deferred profit sharing plan (DPSP)
  • Locked-in retirement account (LIRA)
  • This is all in addition to your employer-sponsored plan, your pension plan, Old Age Security, etc.

What should you withdraw first? “The basic rule when it comes to withdrawing from your investments is to start with anything that’s non-registered, then move on to your TFSA. Leave your RRSP alone for as long as possible so you’re sheltered from tax and to avoid increasing your taxable income.”

But there are exceptions since every situation is unique. “When it comes to government measures that complement provincial and federal benefits, if you’re putting those off, sometimes you’re better off withdrawing from your RRSP first. You can delay claiming your Old Age Security (OAS) and Quebec Pension Plan (QPP) benefits until you’re 70 years old, which will increase their value by 36% and 42%, respectively.”

Should you review your withdrawal strategy if your investments have decreased?

“Not usually,” answers Mohamed Wakkak. If you’re retired and you drew up your withdrawal strategy with an advisor, then it should normally take into account eventual market fluctuations. But if you’re nearing retirement and having doubts about your future, you can contact your advisor and discuss your strategy to make sure you’re still on the right track with your savings and investments.

On the other hand, if you still don’t have a withdrawal strategy for your future retirement and market fluctuations have you worried, it might be the perfect time to take action and meet with an advisor to build your strategy and get peace of mind.

Are you retired and dipping into your investments indiscriminately every month? Turn market fluctuations into an opportunity to make an appointment with an advisor to build a proper withdrawal strategy. Mohamed Wakkak believes that it’s never too late to build a solid plan.

“If you have a withdrawal plan, contact your advisor once a year to check if your strategy is still on the right track, or to let them know of any major changes to your financial situation,” adds Mohamed Wakkak.

When should you convert your RRSP to an RRIF and why?

Before addressing this, keep in mind that the goal of the RRIF (registered retirement income fund) is to turn your retirement savings into income. And to answer the question, you must transfer your RRSP into an RRIF by December 31 of the year you turn 71.

The government created RRSPs to help you save on tax throughout your working life, so you can save for your retirement. Once you reach the age of 71, you’re required to transfer everything into an RRIF and to withdraw a minimum percentage of the savings therein every year. The money you withdraw is considered as taxable income. That means you’ll have to pay tax. “But be careful; since your retirement income won’t be as high, your tax rate will be lower too,” Mohamed Wakkak points out. 

“There are two annual income thresholds you have to pay attention to when withdrawing from your RRSP or RRIF: $20,000 on the lower end (possible loss of guaranteed income supplement or GIS) and $79,054 on the upper end (going over will impact your OAS). If your income is close to one of these amounts, you’ll have to pay tax, and you could lose part of your GIS or OAS.”

Contrary to popular belief, you can open an RRIF at any age. For example, an RRIF may be a good idea for someone who wants to retire at 55. Once again, it’s best to discuss your retirement goals with an expert to determine the right time to transfer your RRSP into an RRIF.

What are the advantages to speaking to an advisor about a withdrawal strategy?

While you can find lots of advice on the Internet, a good withdrawal strategy should be personalized and take into account your financial situation. You’ve saved for your retirement for years, so it would be a shame to not maximize these savings.

“Beyond providing guidance and support, your planner will ask you tons of questions about your dreams and retirement goals. Depending on the client’s needs, they will often propose different scenarios. You can also split your income with your spouse. It’s a strategy that could reduce the amount of tax you have to pay.”

What questions will they ask you and what documents do you have to bring?

It’s crucial that you prepare before meeting with your advisor. Other than gathering important documents – tax statements, notices of assessment, investment statements, pension funds – you should take the time to think about your retirement.

What will your cost of living be when you retire? How about your monthly expenses? What’s the minimum income that you’ll need every year? Do you want to buy a pop-up camper? Every year or every five years? Will you have to redo the roof of your house in ten years? Change your car in five years? If you get sick, will you be able to afford home care?

“The more information people give us about their dreams and their goals, the more specific their withdrawal plan will be, and they’ll be able to enjoy their retirement to the fullest,” Wakkak concludes. 

Our advisors can help you plan your retirement. 

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