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There’s more than one way to optimize your income after retiring. Some strategies can boost wealth, and others may leave a bigger estate for your heirs.
Do you have any tips for withdrawing from an RRSP?
Some background: My spouse and I are debt-free and mortgage-free. We own our home (current value approximately $1 million). We are hesitant to downsize as this home is accessible for me.
I have approximately $650,000 in RRSPs and $105,000 in TFSAs. At 65, my CPP monthly estimate is $1,200. My spouse has $185,000 in RRSPs and no TFSAs. He is expecting a small monthly defined-benefit pension of approximately $1,900 at 65. His CPP estimate is $1,100.
I have no idea if we qualify for any OAS funding. I do qualify for the Disability Tax Credit and my partner claims the Canadian Caregiver Credit.
I am currently on long-term disability leave from my employer. My LTD insurer mandated that I also apply for CPP disability which was approved. My LTD income is tax-free. Currently on paper, I make just over $18,000 per year. I am 61 and turn 65 in May 2028. My husband is 62 and still working in order to keep health benefits.
—Mary
Hi Mary. I hope you and your husband are both doing well. I can relate a little to your situation as my wife has a mild brain injury and is on LTD (long-term disability) and the Canadian Pension Plan (CPP) disability pension. People forget that the CPP is not just a pension plan but also a disability plan. My wife receives a taxable indexed CPP of $16,000 a year to age 65, and I suspect you will receive a similar amount.
To best answer your question about registered retirement savings plan (RRSP) and registered retirement income fund (RRIF) withdrawal strategies, I have modelled your situation and created a few different solutions. This will allow you to see the dollar value of each solution. The solutions assume a retirement income of $75,000 a year indexed at 2% for life to age 91, investment returns of 5% and real estate growth of 3%.
I prepared four different models, each one building on the other, and the results are shown in the table below. The purpose of modelling is to help you understand, learn and make good decisions. Here is a brief description of each model:
| Model | Wealth advantage of base plan over strategic plan | Estate advantage of strategic plan over base plan |
|---|---|---|
| Strategy 1: RRIF early | $180,000 | $150,000 |
| Strategy 2: Add surplus to TFSA | $110,000 | $330,000 |
| Strategy 3: CPP & OAS @ age 70 | $65,000 | $420,000 |
The results in the table show that, if your goal is to build wealth, the best strategy is to delay RRIF withdrawals to age 72. If your goal is to leave a larger estate, you had better implement one or all of the strategies. What is your goal, wealth-building or estate preservation?
If you have no children, you may not be concerned about preserving your estate and the base plan could be the best approach. As a matter of fact, if you plan to leave everything to charity, the best approach for wealth-building and estate preservation is the base plan.
Let’s dive into the results of each solution for an explanation of each.
The base plan builds the greatest wealth because tax is deferred as long as possible. Money drawn from a RRSP/RRIF is 100% taxable, just like a paycheque, which results in less money invested to compound over time.
The estate value, by contrast, is lower than any of the other strategic models due to the tax. Taking only minimum RRIF withdrawals starting at age 72 leaves a RRIF account of about $830,000 at age 90 which will push the tax owing at death into the highest tax bracket.
Drawing the RRIF early means paying a little more tax today but less tax on the estate. In some cases, it will help to keep you from entering the OAS clawback zone, which is not an issue for you Mary as there will be no clawback for you.
I suggest converting your RRSP to a RRIF once you know you will be drawing from your RRSP on a regular basis. The advantages of RRIFing include setting the amount of withholding tax on the minimum RRIF withdrawal in the second year, and at age 65 you can pension split and claim the pension tax credit.
The negative is that your husband will no longer benefit from the caregiver tax credit as your income will be too high with your CPP disability income and RRIF withdrawals.
Take surplus RRIF income, and any other surplus, and add it to your tax-free savings accounts (TFSAs), and then add non-registered investments. I assumed you were spending $75,000 a year, so if your total after-tax income was more than $75,000, that extra was reinvested. This provides a larger estate because although you have less wealth, the tax-free nature of TFSAs means paying less tax in the estate.
RRIF bridging—temporary accelerated withdrawals from your retirement savings—allows you to delay your CPP and OAS to age 70. This approach comes closest to matching the wealth achieved by the base plan. This is because although you initially drew down on your investments a little faster, you can save more money once the larger CPP and OAS start.
Mary, I hope you can see there is no one-size-fits-all RRIF strategy. The first step is to really think about your spending in retirement and how it might change. Then you can look at strategies.
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