National Post article: Should Douglas, 66, start tapping his RRSPs and boost his TFSA to minimize tax?

The National Post asked me to review the retirement plan of Douglas*, a 66-year-old from Ontario enjoying a modest, comfortable lifestyle with his wife in their debt-free $900K home.

He’s getting conflicting advice: 

“Should I start withdrawing from my RRSP to grow my TFSA and non-registered investments — or just let everything keep growing?”

With a $758K investment portfolio and $48K/year in income, Douglas doesn’t need to rush, but timing matters.

Some of the key questions we explore in the article:

• Why his portfolio is large enough to reliably support his very modest lifestyle.
• Whether it is smart to withdraw from his RRIF to contribute to his TFSAs.
• When to convert his RRSP to a RRIF (hint: wait until age 71).
• Why he should withdraw only from his LIRA, not RRSP — for now.
• How to increase his LIRA withdrawals each year to match inflation.
• Why he can be confident in leaving a strong estate for his kids and grandkids.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

National Post article: Should Douglas, 66, start tapping his RRSPs and boost his TFSA to minimize tax?

Financial Plan

To maintain his retirement income of $48,300/year before tax, Douglas needs $480,000 of investments. His portfolio of mainly equities and equity funds should be able to average a long-term return of 7%/year. Douglas has $758,000 of investments, which is about 60% more than the minimum he needs.

Douglas is in the lowest 19.55% marginal tax bracket and can make $4,500/year more without going into a higher tax bracket.

He is withdrawing 3.2% of his investments per year, which is sustainable. With his investments being primarily equity, withdrawing up to 4%/year has provided a retirement of at least 30 years 97% of the time the last 150 years.

His existing retirement income should be sustainable for life, unless something major changes in his desired lifestyle.

Questions

“Does it make financial sense to convert my RRSP to a Registered Retirement Income Fund now and begin withdrawing funds to increase TFSA contributions and to rebuild my non-registered investment account?” he asked. 

No, not now. He should start withdrawing $4,500/year more from his LIRA in 2 years, just before he turns 68. Douglas could withdraw up to $4,500/year from his LIRA at the lowest 20% tax bracket, but there does not seem to be a reason to do this or pay this tax now. He could do it if his TFSA depletes completely.

Douglas should withdraw only from his LIRA and not convert his RRSP to a RRIF until he is forced to at age 71. The LIRA is a locked-in RRSP, which means it is the same as an RRSP except less flexible, so he should withdraw only from the less flexible account.

Douglas will be pushed into the 30% marginal tax bracket at age 72, after he is forced to convert his RRSP to a RRIF. Withdrawing more today from his LIRA means paying 20% tax to save 30% tax in 6 years. The 20% withdrawal is likely to grow to more than 30% in 6 years, so it is not worthwhile doing today. In 2 years, he can start withdrawing up to $4,500/year more from his LIRA and paying 20% tax to save 30% tax only 4 years from that point. The $4,500/year is the maximum he can withdraw without going into the higher tax bracket.

He is contributing $300/month to his TFSA now. He can double this to $600/month in 2 years when he starts withdrawing the extra $4,500/year from his LIRA, which is $3,600/year after tax. If he does not touch his TFSA and keeps adding to it annually, it should grow on its own over time.

“What are the best strategies to preserve/grow my portfolio to ensure I can live comfortably and leave an estate for my children?”

There is no need to touch his RRSP until he is forced to at age 71. He can withdraw up to 7.5% of his LIRA per year at his age 66, which is $36,750, which leaves a lot of room if he wants to withdraw more above the $24,000/year he is withdrawing.

Douglas says his LIRA withdrawals are not indexed, but he can specify the amount to withdraw every year. He should just increase his withdrawals by inflation each year.

Douglas could live a bit more comfortably now by withdrawing an extra $4,500/year from his LIRA and continuing to increase his withdrawals every year by inflation. That would still be a sustainable long-term withdrawal. However, he seems comfortable with his current lifestyle, so he can let his investments grow to leave a larger estate for his 4 children and 6 grandchildren.

Since he is only withdrawing 3.2% of his investments per year, while they are expected to grow about 7%/year (or possibly more) long-term, his $758,000 investments should grow to over $1 million by age 75 and about $2 million at age 90. He also has his half of their home, although Anne is likely to outlive him and might want to keep it at that point.

In total, his growing portfolio and home value should be a nice estate to leave for his children and grandchildren. They also provide a very comfortable margin of safety, in case he needs more money in the future or has expensive health issues, or wants to move to a more expensive retirement home in the future.

Ed