You’re finally there – ready to take all those dollars that you worked so hard to earn and save during your life and turn them into an income for your retirement.
Well, if you’re at that stage in your life hopefully you have done some study and planning so that you can create an income in the most tax-efficient manner possible that will last you for the rest of your life and also leave a legacy for your loved ones.
“Having the proper advice is paramount,” says Melanie Adams, a financial advisor with Sun Life Financial in Barrie, ON. “The sooner you can start thinking about what you would like your retirement to look like, the better. The goal is to have enough income to last your lifetime and save on tax while you are alive and when you pass on.”
Many people will choose a very popular option of converting their RRSP into a Registered Retirement Income Fund (RRIF) at the end of the year in which they turn 71.
Like an RRSP, your savings grow tax free in your RRIF and you choose your investments. However, you must withdraw a minimum amount each year, which is taxable.
Mandatory withdrawal amounts start at about 5.4 per cent of the value of funds in the account and increase each year. As of July 2017 the withdrawal amount at age 80 was 6.82 per cent of the value of the plan.
If you have a spouse who is younger than you, you can use their age to calculate your minimum withdrawal amount, which can reduce the amount of tax you pay.
This can be a good strategy if you have other sources of income and want to leave your money in your RRIF as long as possible.
Some people may wish to start receiving a retirement income after 65 and may choose to withdraw money from their RRSP before the mandatory age to convert to a RRIF.
This is possible and can be done by withdrawing all the money in a lump sum or through regular withdrawals, but the money withdrawn is fully taxable for the year in which it is withdrawn.
Conventional wisdom advises to keep your money in an RRSP until the last minute to maximize the tax deferral since the money is not taxed until it is withdrawn.
It’s important to look at all your sources of income. If your income reaches a certain level your Old Age Security (OAS) may be clawed back.
The Tax Free Savings Account is a way to diversify your income. You can withdraw money and never pay tax on it or the gains you have made and you can recontribute to it later.
“It’s a great way to supplement other income sources, all of which are taxable, and to pay for major purchases and expenses and to control your taxable income,” says Adams.
Adams says investments in your retirement accounts should be based on your goals, your tolerance for risk and how much you need to fund the retirement you want.
“If you need more to make sure you have enough money to last longer then you probably want more equities to provide growth, but if you don’t you may want less in equities and more in fixed income,” says Adams. “It’s a mix of your personal situation and your tolerance for risk.”
Retirement income planning can be complicated, so having good professional advice is paramount.
“Advanced planning for retirement income is needed so you can have the kind of retirement you want,” says Adams. “The sooner you can give thought to what you want your retirement to look like the more likely you are to ensure you have enough to meet your goals.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.