How To Design Your Retirement Income: An Overview (Canadian Financial Summit 2023)

With the Canadian Financial Summit coming up at the end of October, I wanted to share over the next few weeks some videos that Summit attendees watched last year.

When you register you get access to talks like these, plus a myriad of other speakers who are some of Canada’s top financial experts. 

I’ll be promoting the Summit and giving away free tickets too!

//

When it comes to retirement, it’s crucial to get the big picture right before diving into the details. 

Setting up your retirement income involves more than just ticking boxes; it requires a strategic approach to ensure you’re financially secure throughout your retirement years. 

In this video and podcast episode, Barry Choi interviewed me about designing your retirement income effectively.

The 4 Steps to Design Your Retirement Income

1. Define Your Retirement Goals: Determine what’s important to you about money and lifestyle. What kind of retirement do you envision? This will guide your planning.
2. Calculate Your “Number”: Establish how much money you need to achieve financial independence. This is your retirement target.
3. Understand Key Concepts: Familiarize yourself with the essential aspects of retirement income, such as withdrawal rates, investment strategies, and tax implications.
4. Design Your Income Plan: Figure out how much you should withdraw from each source, such as pensions, RRIFs, CPP, and OAS, and when to start each one.

Key Concepts to Grasp

Withdrawal Rates: How much can you safely withdraw from your investments each year? The classic guideline is around 4% for equity investors, though this can vary. For instance, Ed’s catchy rule is “2.5% + .2% for every 10% in equities.”

Tax Efficiency: Understand the tax implications of your withdrawals. Fully taxable sources include RRSPs and pensions, while TFSA withdrawals are tax-free. A mix of taxable and non-taxable income can help minimize your lifetime tax bill.

Income vs. Cash Flow: Distinguish between taxable income and cash flow needed for your lifestyle. Managing this balance is key to maintaining a comfortable and financially stable retirement.

Retirement Income Design Strategies

1. Defer Taxes as Long as Possible: Keep your investments growing by delaying tax payments. Withdraw from TFSA and non-registered investments first, and consider saving RRSP deductions to offset taxable income in the future.
2. Withdraw Only in the Lowest Tax Bracket: Aim to withdraw just enough to stay within your current tax bracket. This strategy often means withdrawing from pensions and RRIFs up to a target tax bracket, and using TFSA and non-registered accounts for additional needs.
3. Maximize GIS Benefits: Utilize strategies to qualify for Guaranteed Income Supplement (GIS) payments, which provide tax-free income. This may involve structuring your withdrawals to keep your taxable income low.

Practical Considerations

• Starting CPP & OAS: Decide whether to start CPP and OAS early or defer them. Early withdrawal can be advantageous for equity investors, while conservative investors might benefit from delaying.
• RRIF Withdrawals: Generally, start your RRIF when you retire or in January of the following year. Your withdrawal strategy will depend on your chosen retirement income strategy.
• Commuting Pensions: Consider whether to commute your pension. While commuting offers control over investments and potential estate benefits, it also has drawbacks and is not reversible. Get professional advice to make an informed decision.
• Estate Tax: Although estate taxes are a concern, they are often less significant than anticipated. Focus on tax deferral strategies rather than stressing over potential future estate taxes.

Summary

To design your retirement income effectively:

1. Choose one of the three retirement income strategies based on your goals and tax considerations.
2. Develop a plan to achieve your desired lifestyle while minimizing lifetime taxes.
3. Make decisions on when to start various income sources and how much to withdraw from each.

By following these guidelines, you can create a robust retirement plan that supports your lifestyle and ensures financial security throughout your retirement. 

Ed