Pensions put couple in good position to live off retirement savings

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Ontario-based couple Kathleen*, 62, and Charles, 65, are preparing to start drawing from their retirement savings as their main source of income and are looking to put their registered retirement savings plans to work for them.

Specifically, they’d like to know if Charles should be converting his RRSP, currently worth $1.25 million, into a registered retirement income fund (RRIF) and start drawing income. They’d like to leave Kathleen’s RRSP savings of $600,000 alone until she turns 71.

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“If I withdraw more than the annual minimum from a RRIF, can I income split that extra amount with Kathleen? What tax implications should we be considering?” Charles asked.

Beyond converting to a RRIF, he wonders if there’s something else he should do with his RRSP savings.

Kathleen retired from the public sector at the start of the pandemic and receives $650 a month from an employer pension and $600 in Canada Pension Plan (CPP) payments. Charles is entitled to the maximum CPP amount and plans to apply for both that and Old Age Security this year, and then allocate 50 per cent of that to Kathleen to minimize tax. Their monthly expenses are $4,500, but will jump to $5,000 when they open their cottage this summer.

In addition to their RRSPs, 52 per cent of which are invested in stocks and stock exchange-traded funds (ETFs), with the rest in guaranteed investment certificates, bonds and bond ETFs, Kathleen and Charles’ portfolio includes $48,000 in a tax-free savings account (TFSA). This account is invested in a low-cost indexed monthly income fund, as well as U.S. and international mutual funds. They also have $15,000 in a savings account.

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Kathleen and Charles are debt free and own their principal home, valued at $1 million, and a $500,000 cottage. They plan to remain in their current home for at least five years before downsizing, and would like to keep the cottage for as long as possible.

They each have whole life insurance policies worth a total of $175,000 (monthly premiums are $125 combined) and both have wills in place. The couple would like to continue to take annual vacations, which typically cost about $10,000.

What the expert says

In terms of pensions and income splitting, Kathleen and Charles are in an enviable position, said Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management Inc. in Vancouver.

“It makes sense for Charles to start a RRIF with his RRSP since he is 65,” he said. “Kathleen cannot split her potential RRIF payments until she is 65, so that is a good reason to postpone her RRIF, at least until she is 65 or later. Plus, it will allow further tax-sheltered compound growth of Kathleen’s RRSP.”

If Charles doesn’t want to convert his RRSP to a RRIF, he may want to consider an annuity (a financial product sold by life insurance companies that pays out a fixed payment stream), but there are trade-offs.

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“While annuity rates might be attractive given today’s interest rates, the downside is the turning over of capital to an insurance company in return for an annuity payment for the rest of his life,” Egan said. “That route simplifies things in not having to manage the money, but he loses control of the money such that if there is no survivor protection in the annuity, the money is gone.”

If Charles decides to delay converting to a RRIF and instead withdraws ad hoc amounts from his RRSP leading up to age 71, he won’t be able to pension split those RRSP withdrawal amounts, according to the pension-splitting rules. So, starting his RRIF now and Kathleen deferring hers makes financial sense.

“Charles’ minimum annual RRIF amount will be approximately 1/25th of the value of his RRIF based on his age. This will be about $50,000 per year, which he can arrange to be paid monthly, quarterly or whatever he wishes,” Egan said. “He will have to make sure there will be sufficient liquidity to facilitate those RRIF payments as they occur.”

For example, if Charles draws quarterly RRIF payments, he would have to look at his cash position just prior to the withdrawal.

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“If he elects to take minimum RRIF payments, there is no tax withholding,” Egan said. “If he wants tax withheld, he has to request it. Otherwise, he will fall into the quarterly tax instalment regimen.”

Egan believes the $50,000 RRIF plus Kathleen’s pension and their respective CPP entitlements and OAS for Charles will be more than sufficient after tax to cover their $5,000-a-month desired lifestyle spending. If they have surplus savings, they can direct that to their TFSAs and gradually use up any contribution room.

As well, they can adjust Charles’ RRIF payments upward to above the minimum in future years and/or access the TFSA for some extra travel money. Plus, they still have Kathleen’s RRSP growing tax free until her age 71.

“At a simple rate of return of five per cent per year, her RRSP would grow to $930,000, at which time she would transition into a RRIF and start RRIF payments in the year in which she is 72,” Egan said.

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He also recommends leaving their TFSAs alone to serve as a source of future capital, but review the asset mix of their respective RRSP accounts to ensure they are following a prudent, diversified and balanced investment strategy designed for the long term and for some income generation once Charles starts withdrawing RRIF income.

* Names have been changed to protect privacy.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at aholloway@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

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