Do you have a plan for withdrawing your investments when you retire?
You’ve been putting aside money over the course of your working life and now it’s time to tap into these funds for retirement.
What’s your goal? You’ll want to have enough money for the rest of your life, without scrimping too much!
Is there an art to withdrawing from your investments? You bet! Read on for a simple explanation.
What are your retirement goals?
Before diving into the math, ask yourself what you want in retirement. What are your needs and what are your dreams?
It’s possible your lifestyle will change depending on your state of health. At the beginning, you may spend more money on travel and active pursuits. But keep in mind that you may eventually need health care and adapted accommodation.
Where do you begin? With a budget!
Before making a plan to tap into your investments, prepare a budget. On one side, list your expenses. On the other, your income.
Figure out what you will need to maintain your lifestyle at retirement. It’s more complicated than a percentage of your earnings, and you’d do better to determine an amount.
On the retirement income side, there are a number of sources:
- A pension plan offered by your employer
- Québec Pension Plan (QPP) (This hyperlink will open in a new tab)
- Old Age Security (OAS) (This hyperlink will open in a new tab)
- Guaranteed Income Supplement, if applicable
- RRSP
- RRIF
- TFSA
- Locked-in Retirement Account (LIRA)
- Non-registered investments (bank accounts, capital gains, dividends, etc.)
- etc.
Maybe you plan on working part-time or starting a business? This income should also be included in your calculations!
The ideal approach is to go over all the angles with a financial advisor. They have the expertise to help you out.
And now, how to withdraw
Now that you have a budget, we can get down to business. To find out exactly how much you should withdraw from your investments, you need to take into account the following factors:
- Tax rate
- Income
- Age
- Needs (lifestyle, expenses, etc.)
- Marital situation, such as for income splitting
- Estate planning
- Diversifying investments to protect those that will be withdrawn in the first five to seven years
You should consider that life expectancy (in French only) is constantly increasing: Age 84.1 for women and 82.3 for men. Since you may very well live longer, you need to plan your investments with that in mind.
Inflation and your purchasing power
Inflation is the subject of the hour in the media these days! It’s a reality that makes it difficult to make projections for retirees and those planning to retire.
When the prices of goods and services skyrocket, your purchasing power drops. Your advisor always includes inflation in the calculation of how much to withdraw.
What should you do with your TFSA?
The beauty of a TFSA is that you can keep it your whole life. When you withdraw funds, you don’t pay tax! You can even continue contributing if you haven’t reached your ceiling.
In some cases, it’s preferable to draw down your TFSA before tapping into your RRSP. This strategy allows you to defer tax and reduce the tax on your investments.
Talk to one of our financial advisors to find out if this is the best tactic for you.
What should you do with your RRSP?
You have a number of options.
The first is to withdraw a portion of your RRSP before age 71. If you spread these withdrawals over several years, you may pay less tax.
Once you turn 71, you don’t have any choice. You must convert your RRSP into a RRIF or purchase an annuity.
With a RRIF, the interest on your investments is sheltered from tax. Each year, you must withdraw the minimum amount from your RRIF. These withdrawals are considered income and are subject to tax.
The appeal of an annuity
Unlike investments in your RRIF that can fluctuate with the markets, an annuity is a tool for providing a guaranteed, predictable income. You won’t experience any unpleasant surprises. Right from the start, you’ll know how much will be deposited into your bank account. The income can even be indexed to inflation.
You can purchase an annuity with your registered investments, such as your RRSP, or your non-registered investments.
Don't forget your LIRAs!
Do you have funds from a former pension plan in a locked-in retirement account (LIRA)? Are you age 65 or over and have a pension plan? Opt for a life income fund (LIF). You can withdraw retirement income while continuing to grow your savings in line with your risk tolerance.
By working with one of our financial advisors, you can evaluate how many years it will take to disburse your accumulated savings.
Same for First Home Savings Accounts (FHSA)!
This new vehicle in the investment world is not just limited to purchasing a home as its name implies!
If you already have one, you have 15 years to buy a home. Otherwise, your FHSA must be closed.
But you can transfer the amounts accumulated in your FHSA into an RRSP or a RRIF without any penalties. This option is particularly attractive if you have used up all the contribution space in your RRSP. This way, returns are tax-sheltered until you begin drawing them down.
How to reduce tax on withdrawals
The goal of working with our financial advisors is to reduce tax to the minimum without changing your tax bracket. This will allow you to not only make your savings go further but also offset what taxes your estate will be required to pay after you die.
And how is this done? With a plan that spreads withdrawals from your investments over registered and non-registered accounts. The order in which you tap into your retirement funds is crucial for ensuring that enough tax is deducted on this income.
To assess and re-assess
Withdrawing funds from your investments is an important part of planning for retirement. Make a plan that can be adapted to fluctuations in the markets and unforeseen events.
Once a year, review your withdrawal plan with one of our financial advisors to ensure that it still meets your needs.
Enjoy your retirement!