Why should you have a withdrawal strategy for your retirement?
Life expectancy is increasing, meaning people are retired for longer periods. This, along with inflation, should encourage you to set up a good withdrawal strategy so you can make the most of your retirement.
For your own peace of mind, you should contact your advisor to discuss your strategy, make some calculations, and check you’re still on the right track with your savings and investments.
“Having an investment withdrawal strategy gives you peace of mind that your assets will meet your needs once you are no longer earning,” said Mohamed Wakkak, Financial Planner and Senior Advisor at National Bank. “You should avoid dipping into your savings every month without taking into account tax rules and laws. Instead, make your savings and investments work for you.”
Where can you withdraw funds?
Depending on your financial situation and working conditions, there’s a very long list of savings vehicles you can withdraw funds from when you’re retired:
- Non-registered savings account
- Tax-Free Savings Account (TFSA)
- Registered Retirement Savings Plan (RRSP)
- Locked-in RRSP
- Deferred Profit Sharing Plan (DPSP)
- Locked-in Retirement Account (LIRA)
- And don’t forget about your employer’s pension plan, the Quebec Pension Plan (QPP) and Old Age Security (OAS) pension, etc.
Furthermore, if you own at least 10% of a business, you could take advantage of an individual pension plan (IPP) to increase your contribution room.
Where should you withdraw from first?
Remember that everyone’s situation is different, so there often exceptions, which is why it’s important to speak to your advisor as soon as possible.
“A wide-spread belief is to start withdrawing from your non-registered investments, then your TFSA, and only convert your RRSP to a RRIF at the age limit to defer taxes and reduce taxable income,” explained Mr. Wakkak. But this rule doesn’t apply to everyone. You have to thoroughly analyze all sources of retirement income first. Sometimes it's better to spread out the amounts you receive from your RRIF or LIF so that when you turn 71, you don’t suddenly have an income spike that could push you into a higher tax bracket.
“Don't forget that no two scenarios are alike. In some cases, government measures can top up provincial and federal plans if you delay receiving them. It may be better to withdraw from your RRSP first. You can push back when you start collecting your OAS or QPP until age 70, which can increase the amounts they pay out by 36% and 42% respectively,” added Mr. Wakkak.
Do you have to review your withdrawal strategy if your investments have decreased?
“Not necessarily,” said our financial planner. If you’re retired and your withdrawal strategy was set up by an advisor, it should take into account possible market fluctuations. However, it’s a good idea to review your strategy when major changes occur, such as taxation changes, to see if this has an impact on your existing strategy.”
If you still don’t have a retirement withdrawal plan and you’re concerned about market fluctuations, this is perhaps the best time to go meet an advisor to build your strategy. According to Mohamed Wakkak, it’s never too late to build a solid plan.
“Once you've got a withdrawal plan, get into the habit of meeting with your advisor once a year to see if your strategy is still working for you, or inform them of major changes affecting your financial situation,” he added.
When must you convert your RRSP to a RRIF, and why?
Before answering this question, remember that the purpose of the RRIF (Registered Retirement Income Fund) is to convert your retirement savings into income. You have to convert your RRSP into a RRIF by December 31 of the year you turn 71 years old.
From then on, you have to withdraw a minimum percentage of the savings invested in your RRIF every year.
These withdrawals are considered income, so therefore taxable. “But remember that once you retire, your income should be lower, consequently your tax rate should also be lower. This is why it’s important to analyze the sources of your retirement income,” said Mohamed Wakkak.
“There are two annual income thresholds that you must pay close attention to when withdrawing from your RRSP and RRIF. Firstly, once you withdraw more than $24,624, you could lose some or all of the Guaranteed Income Supplement (GIS). Then, once you get higher than $79,054, you could start to lose some of your OAS, and will lose it completely once your income exceeds $128,149.”
Did you know that you can open a RRIF at any age? For example, a RRIF could be useful for someone wanting to retire at age 55. But it’s always best to discuss your retirement objectives with an expert to decide when the best time is to convert your RRSP into a RRIF.
It’s also possible to split your income with your spouse, which could reduce how much tax to you have to pay. There are many other strategies that you can use.
What questions should you ask and what documents do you have to bring?
Before you meet with your advisor, make sure you're prepared. Other than important papers—income tax return, notice of assessment, investment statements, pension fund statement—you must also take some time to think about your retirement.
What will your cost of living be once you retire? What about your monthly expenses? What’s the minimum amount of income you’ll require? Do you plan to buy a trailer? Will your roof need redoing in the next 10 years? Are you planning to get a new car in 5 years? If you get sick, will you be able to pay for home care?
“The more information people give us on their goals and projects, the more meticulously we can plan their withdrawal strategy and they’ll be able to take full advantage of their retirement,” said Mohamed Wakkak. We're here to answer all your questions on your personalized withdrawal strategy.