Crafting a Retirement Plan to Suit My Needs

In my very first article, I spoke about how the landscape of retirement is changing for Canadians in this day and age. We are living longer lives and things are getting more and more expensive. Gone are the days where you can walk into a bank and get a guaranteed investment certificate that pays you 10%. This means that we need to stay invested longer, and in order to get a reasonable rate of return, we need to take on more risk with our investments. There are a few options that are available to any Canadian that wants to save for retirement and we need to understand how these different investment vehicles work in conjunction. How each investment vehicle is different and should be viewed as a separate basket to accomplish different aspects of your retirement goals. In this article, I will walk you through: how we should be viewing each of these baskets; what you need to consider from a tax perspective when withdrawing savings; and eventually when the assets pass, upon death, what can we expect. Keep in mind that I am speaking in general terms, and each person reading this should be consulting with a qualified financial advisor to figure out what would be best suited for their specific needs. There is no silver bullet when it comes to retirement planning and each person’s retirement plan should be customized to fit their financial aspirations.

The responsibility of saving for retirement has been shifting over the years and the onus is being transferred on the individual. The days of the employer providing pensions and benefits in retirement are fading away. If you are just starting out to save for retirement, like most Canadians, we tend to flock towards Registered Retirement Savings Plan (RRSPs). The rule of thumb for investing in an RRSP, is that we contribute during our working years to take advantage of the tax credits and once we retire, the goal is to ensure that we pull out those savings at the lowest possible tax bracket to crystalize the tax savings. Once we have maxed out our allowable space in the RRSP, the investment account that follows as a savings vehicle is the, Tax Free Savings Account (TFSA). Money that is placed in the TFSA is considered after tax dollars and any growth generated within the account does not bear the burden of tax. Pulling funds out of the TFSA also does not incur any taxes. Both accounts that I have just mentioned are considered registered accounts and have a maximum allowable contribution limit. The last account that Canadians use for a savings vehicle is the Non-Registered (Cash) account. This account does not have any kind of limit as far as contributions are concerned and any growth that is generated within the Cash account is taxed favourably. This income is taxed in the year it is earned and is dependant on whether the investments produced capital gains, dividends, or interest income.

The first question anyone must ask themselves when preparing for retirement is “How do I see myself in retirement?”. Things to consider are whether you are: a traveller; engaged grandparent; volunteer; hobbyist; or just simply want to relax? The next series of questions that need to be considered to build the basis of your plan, include:

-         What are my ongoing expenses going to be?

-         What are my sources of income?

-         What is controllable and what is not? and

-         How much debt do I still have outstanding?

All of these are questions must be answered before any individual transitions over to retirement. There is a period of time, that I refer to as the transition zone. This zone, in my opinion, spans 10 years of life, 5 years prior to retirement and 5 years after. This is very crucial time, during which I would highly recommend a re-evaluation of your retirement plan to make sure that all aspects are clearly laid out and you understand what you should be expecting in the coming years.

Once we have a good understanding of these topics, we need to have a deeper look into the types of income that we will be getting in retirement. Which of these sources of income can I split between myself and my spouse, in order to keep my tax bill at its lowest? When thinking of income, we need to be cognizant of OAS claw-back which is triggered when an individual’s taxable income reaches above $73k, which amounts to an additional 15% on top of your personal marginal tax. When someone has a large portion of their savings in the RRSPs, we need to evaluate when is the best time to start withdrawing from them. More often than not, I have met clients that are advised to hold onto the RRSPs till the age of 71 and let them grow. At this age the government forces your hand and you must convert the RRSP into a Retirement Income Fund (RIF) and proceed to withdraw the minimums. The downside of leaving the withdrawal process to this point is, first of all you have another stream of income much later in retirement which you cannot control and this pushes your income bracket higher. Another potential threat is when the owner of an RRSP passes away, their assets are deemed to have been sold which triggers taxes, unless the assets flow to a spouse, in which case they will do so tax free. If you have a sizeable RRSP account and you are withdrawing the minimums after the age of 71, you could be faced with a large tax bill once the assets pass onto the next generation. In my experience, I have seen registered accounts get hit with a 50% tax bill once the registered owner has passed. This tax is passed onto the estate, which then must be paid for by the executor. My guess is that after working so hard for so long, a lot of us would want to avoid the government taking away 50% of our money and would rather it end up in the hands of our loved ones or charities, if that is your priority. If you were to couple any RRSP assets with employer pensions that some us may still be receiving, having a RRSP meltdown strategy becomes of the utmost importance, because to the more income streams you have, the more important it is to make sure we are keeping the income in our retirement years manageable. 

The TFSA should not only be considered an emergency fund and the benefits of holding investments in this type of account are only appreciated if there is growth. The money contributed is after tax dollars, the growth is not taxed and any withdrawals are not added to your taxable income for the year. It is a good idea to name a beneficiary in this type of account, particularly in provinces that have probate taxes. In provinces that permit it, a recognized beneficiary designation will allow the money to bypass the estate and paid directly to the named beneficiary avoiding probate taxes.

The Non-Registered (Cash) account however, works a little differently. Any growth that is generated will be taxed within the year that it is generated, whether it be in the form of dividends or interest. Withdrawals from the Cash account are considered capital gains and are subject to 50% tax of your personal marginal bracket. When withdrawing funds, you can also consider selling the investments that are worth less than their cost base, to offset current capital gains. You may also apply any losses against capital gains earned within the previous 3 years, therefore reducing current or prior years taxes. Unused capital losses can be carried forward indefinitely. Once the Cash account is deemed to be disposed of, upon death, the assets will flow to the beneficiaries as per the last will and testament and the income will be taxed at the personal tax bracket of the recipient.

The average Canadian is living longer thanks to technology and medical advancements. This equates to a simple yet more challenging goal; our savings need to last longer throughout our retirement years. Taxes that are levied on retirement income combined with a permanent loss of capital, which is caused by not withdrawing from the right pool within our investments, and are the biggest threats when it comes to a retirement nest egg. If you are looking to: update your retirement plan; have it evaluated; or simply looking to build one, reach out to a qualified financial advisor to better understand how these options and strategies could work for your goals and desired objectives.

This article was prepared solely by Omar Baqa who is a registered representative of Manulife Securities Incorporated. The views and opinions, including recommendations, expressed in this article are those of Omar Baqa alone and not those of Manulife Securities Incorporated. Manulife and Manulife Securities are trade marks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund.