In RRSP season there is a lot of focus on your RRSP — surprise, surprise.
As most of you know, the RRSP will ultimately turn into a RRIF and be a key source of your income in retirement. What many people don’t always think about is other potential sources of retirement income.
In our work with retirees, we see up to eight different sources of funds that they can pull from to meet their monthly or annual expenses. Some are not thought of that often, but can become important. Not all will apply to everyone, but each one will be important to a segment of retirees.
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Without further ado, here are the eight sources of retirement income:
1. Government Pensions — CPP, Old Age Security (OAS), GIS. For some individuals this can be more than $18,000 a year. It can be even higher if delayed receiving until past age 65.
2. Your Investment Portfolios — RRSPs, RRIFs, TFSAs, Defined Contribution Plans and Non-Registered accounts. The key is to determine which ones to draw on and when to minimize taxes. It will be different depending on your age, your health, your relationship status, and your current and expected level of income.
3. Your Defined Benefit Pension Plan — You may be one of those who have a plan through your work that pays you a fixed monthly amount — that may or may not increase based on inflation.
4. Your Corporate Investment Account — If you have a Corporation, pulling money from here will likely be considered as ineligible dividend income, but could possibly be tax free due to the size of your capital dividend account or shareholder loans. Often there is an opportunity to use insurance for estate planning or even in some cases for Retirement Planning where funds can come out tax free.
5. Annuities — These are essentially lifetime GICs with a locked-in rate that becomes a monthly source of cash flow. They have been less popular due to low interest rates, but for those who bought Annuities thirty years ago and are still alive, they will definitely sing their praises as an option for retirement income.
6. Your Home — If you own a home you can use a Home Equity Line of Credit to draw down cash over time, or maybe a downsize or sale of real estate is a key source of funds for your retirement. In some cases it may even allow for rental income.
7. Insurance Policies — This is sometimes an option and usually a forgotten one. Policy holders can often access cash through the cash surrender value of a policy without hurting the core insurance coverage. Sometimes you can borrow against the policy, or for those in their 30s to 50s, you might even be able to take out a policy on your parents as a form of retirement planning.
8. Your Kids (or other family) — This is usually not a preferred option, but depending on your needs and the family situation, this can be an important source of income.
Behind each of these sources of income is often a fair bit of thought and planning to maximize the income in a tax efficient way. For example, some individuals want less income in retirement. They don’t need the cash flow and they want lower taxes. In that case, they may look to fund Insurance policies in order to lower annual income and increase the estate.
Another scenario is the person with a large RRSP who is in their late 50s or early 60s. A lot of thought might go into the idea of drawing down the RRSP meaningfully over the next 10 years, and delaying taking CPP and OAS until age 70. If they do this effectively, they may be able to receive full OAS instead of getting clawed back, and in addition, they will have a smaller RRIF balance when they die and will face less tax at the end.
Even your home has important retirement income questions. We see people who received full OAS for several years, and then they sold their home and decided to rent. They now have significantly more investment assets and taxable income than they did before selling the house. Suddenly their tax rate goes up and they lose their OAS. In these cases, much more effort needs to go into tax efficient investment, and possibly gifting some assets to family or charity earlier than through the estate.
To help with issues of Retirement Income I have seen a few great Canadian web tools.
The Government of Canada has a solid tool to help manage your Government Pensions.
A website called Savvy New Canadians has a fairly detailed overview of RRSPs, TFSAs, CPP and OAS.
And my firm TriDelta Financial recently put out the 2019 Canadian Retirement Income Guide which provides further insight into how best to manage your various forms of retirement income.
Just like the game of hockey is much more complicated than simply shooting at the net, remember that your retirement income is about much more than simply an RRSP or RRIF. There are hopefully many sources of income for you, but the more sources of income, the more complex some of the tax and planning issues become.
May your biggest challenge be figuring out income sources number one to seven, and not about how to ask for funds from number eight.
Ted Rechtshaffen, MBA, CFP, CIM, is president and wealth advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning. [email protected]