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Canadians have quite a few options for retirement savings. But before you look at when to retire and start withdrawing, create a plan first.
I have a $180,000 DC pension plan from my old employer, and I have to decide whether to transfer it to a LIRA within Manulife as a personal plan (where the group plan is right now), or to transfer to another LIRA (ETF direct investing with my bank).
I am 52 and am considering retiring at 55. I have about $120,000 in RRSP. I also have an LAPP of approximately $600 a month, if I start collecting it at age 65.
My husband is 53 and will be retiring in two years with an RRSP of about $37,000 and a DBPP of approximately $33,000 a year, if he retires at 65. It is between 0.3%-0.4% less if he retires at 55.
I can start collecting CPP at 60 ($600), 65 ($940), and 70 ($1,335); while my husband can start at 60 ($669), 65 ($1,045), and 70 ($1,484).
We currently have a mortgage of $280,000 and will have about $230,000 by the time he retires, approximately nine more years to pay or longer at higher interest rate. Our kids will be finished in university in two years.
What is the best strategy for my DCPP/LIRA? Is it possible for us to retire at age 55 and still manage to pay our mortgage? What will be our best strategy in terms of withdrawing from all our pensions?
—Beni
Beni, you may be putting the cart before the horse. You’re asking for advice, but what is your plan? Without a plan, any financial advice may be completely useless. And, based on your numbers, I can’t say for sure if you are able to retire at age 55.
By “plan,” I mean for you to explore what you want in retirement. What is it you really want to do? With retirement comes an almost blank slate, where you can design the life you want. You can either let your retirement years happen or you can be proactive and create a life of no regrets. You don’t have to have the perfect plan, because things will always change, but you do need a starting point. Every year, update your plan to keep the assumptions honest and to make changes as you see fit.
Start your plan by taking note of your current lifestyle and related expenses. Next, project these costs for the future to discover the truth about your money—what will your money do for you? Then, based on your projections, ask yourself: What are your possibilities? Once you know what’s possible, you can set some financial goals for the lifestyle you want. Now you have to set up a plan, to which financial advice can apply.
Now, let me give you a few general thoughts, which may or may not fit the plan you come up with.
The taxation and withdrawal rules on a defined contribution (DC) pension are the same whether you keep it where it is or move it to your own plan. Base your decision to move the DC plan on the investments available, costs and the advice provided by the financial institution holding your account.
Your retirement income needs to dictate when to start withdrawing from the DC account and your registered retirement savings plan (RRSP). No one knows how long they will live for, but most people accept the notion that they will slow down in their later years.
So, Beni, what do you think of this idea? Why not spend all of your RRSP money by age 80, and then as much as you can from your DC plan? The DC money will convert into a life income fund (LIF), and then you transfer 50% of that to your RRSP or your registered retirement income fund (RRIF).
If you spend all your RRSP/RRIF money by age 80, you will still have your Canada Pension Plan (CPP), Old Age Security (OAS) and pension income for a total income of about $80,000 a year in today’s dollars, plus the income from your LIF. And, you also have your home equity as a backup. Would an income of $80,000 at age 80 be enough for you?
Check to see if your pensions are indexed to inflation, and if there is a bridge benefit that drops off at age 65.
DC pension/LIF and RRSP/RRIF are all taxed the same (by income tax bracket), so there is no tax reason for starting one sooner than the other. However, maximum withdrawal amounts apply to DCs/LIFs, so start withdrawing from them first, followed by RRSP/RRIF.
You may have heard that it makes sense to draw extra from your RRIF and contribute to your tax-free savings account (TFSA). If you follow a plan that has you spending your RRIFs by age 80, I recommend you only draw what you need from your RRIF and not take the extra to add to a TFSA. That extra withdrawal may push you into the next tax bracket and/or affect government credits/benefits.
I bet you are also reading that you should delay your CPP to age 70. Well, the math says if you delay CPP, you will have a higher guaranteed income for life. This is added income protection if you spend all your savings by 70 and your only income is CPP and OAS. But it also means you may have less income to keep up your lifestyle in the early years of your retirement. A good pension offers you more flexibility when deciding when to start your CPP.
Finally, consider what will happen to your income when one of you dies. Your total CPP income will be reduced and it will be based on the survivor’s maximum CPP at age 65. You will receive a CPP death benefit of $2,500, which is taxable. One OAS pension will cease, and you will no longer be eligible for pension splitting. Plus, there will likely be changes to the income from your workplace pensions.
So, there you have it, Beni: a few quick thoughts that may or may not align with your future plans. My main suggestion for you is to first visualize or create the life you would like to have. Most financial planners have the tools and software to help you do this. Once you have your life plan, your planner, using their software, will demonstrate financial strategies and tactics supporting your plan.
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A great example of how wonderful DBPP are and Béni is very lucky to have it! Too bad most people don’t. How much would you have to save in an RRSP to have a $33,000 annual income ? I am curious how you got to $80,000 a year at 80 years?
$33,000 + CPP + OAS= I guess CPP + OAS Will be worth $47,000 in 24 years? The challenge I see is how far will $80,000 go in 24 years? I am not certain how either of them could retire at 55?
I earn dividends in one self directed RRSP account. I earn GIC interest in another RRSP plan. I earn interest from a mortgage investment corporation in another RRSP plan what I struggle with is knowing where to take the money first should I take all the interest and dividends & no capital or should I take the capital and interest from the lowest paying Investment?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.