Planning for your Retirement
Over the last few decades, you have been saving regularly and built up your retirement portfolio; now what happens? When should you take your CPP and OAS? How does a Registered Retirement Savings Plan (RRSP) change to a Registered Income Fund (RIF)? What is the effect on my retirement from a market downturn? These are just some of the questions you might have during this life event. Having a full understanding on how and when to collect your income is extremely important.
Taxes in retirement
One of the prominent factors in retirement is being as tax efficient as possible. Your pension plan, RIF payments, RRSP withdrawals, CPP and OAS are all taxable income. Some of these payments have taxes withheld at the source, such as with your RRSP or RIF. Other sources of income, such as your CPP and pension, will have to be set up to have taxes withheld to ensure you don’t owe any additional money at tax time. Splitting your CPP with your spouse can help lower your taxes by transferring money from the higher income earner to the lower earner. Tax-Free Savings Accounts (TFSAs) do not count as income and will not affect your OAS claw-back. Utilizing this account can help save you thousands in retirement as well as save for the future.
When to collect
Figuring out the best time to start collecting your income as well as which sources to withdraw from not only helps to save on taxes but can also ensure that your income lasts through retirement. In certain circumstances, collecting your CPP and OAS early might make sense depending on your sources of income. Or vice versa, it might be in your best interest to wait to collect your CCP and OAS, and instead use other sources of income to fund your retirement. If your pension has a bridge component, it might be smart to wait to collect your CPP until the bridge ends at 65.
With the most recent market downturn as a result of the coronavirus, many retirees are concerned about outliving their money. When you convert your RRSP to a RIF, the year you turn 71, you are still investing your money. With the changes to the investment world, keeping your money only in Guaranteed Income Certificates (GICs) is no longer a viable option for growth. Rather, to achieve the returns necessary to maintain your income, you need a mixture of GIC’s, bonds, and equities. Depending on each client’s situation, different mixes and proportions of GIC’s, bonds and equities are appropriate. Another method to help protect your income during market downturns is to use a “cash wedge” to redirect your RIF withdrawals from your equities to GIC’s.
There are many questions that need to be answered before and during retirement. The one thing you want is to be confident that your money is going to last your full retirement, even during the downturns. You also want to ensure that you are being as tax efficient as possible. Working with a financial advisor can help confirm that you are on track to live the best retirement possible. Don’t wait until you retire to speak to an advisor; act now and better prepare yourself for the future.