Harmonious Enhancement of Retirement Sources

Sheila MacKay | Member, ARTA Pension & Financial Wellness Committee

ARTA’s Pension & Financial Wellness Committee recently sponsored the webinar, “Enhancing Retirement Sources.” Rick Harcourt from Capital Estate Planning Corporation explained how to responsibly take money out of our savings, specifically Registered Retirement Income Fund (RRIF) and guaranteed products such as annuities. Mr. Harcourt offered this summary of the webinar.

The essence of the webinar was to show members how “flexibility” vs. “guaranteed balance” works and to teach strategies to decide which route (or combination of routes) can harmoniously enhance our retirement income streams.

When we’ve spent most of our life saving, how do we approach getting our money back out? Most financial literacy is directed toward the
accumulation phase of savings — encouraging people to save, teaching various concepts, and so on. At a certain point though, we reach the stage of decumulation — taking our money out. Typically, this happens at one of two times:

  • When we need it. This will vary depending on the household. For some retirees, they’ll use it as a top up to bridge the gap between when they retire and when federal government benefits like CPP and OAS start. For others, they will keep the bulk of their savings intact in case of an unforeseen expense, or for future expenses like long-term care later in life.
  • At the end of the year when we turn 71. The Canada Revenue Agency says that you can no longer tax shelter your RRSP; you must employ
    one of the following income options.

Income Options 
Generally, when we take money out of our RRSPs, we have three main options:

  • Cash it out. Money can be taken out of your RRSP in a lump sum payment at any time. When you do this, it gets added to your income for the year. A large sum could quickly put you into a high tax bracket in that year of withdrawal. You’ll pay an upfront withholding tax at the time of withdrawal — 10% for $5,000 or less; 20% for $5,001 to $15,000; 30% for over $15,000. This isn’t a strong option for most people unless they need cash immediately.
  • Convert your RRSP to a RRIF. With a RRIF, you continue to invest your funds, like you did with your RRSP. You only pay tax on the amounts you withdraw — the rest continues to grow tax-sheltered. You’ll have regular payments — for most people, this will be the RRIF minimum set by the government. At age 71, the minimum withdrawal is 5.28% of the RRIF balance, but if you need to take extra funds out at any time, you can — you control these. The minimum withdrawal percentage increases each year. For RRIF payments, you’ll have the option of deciding how often you’d like to take your money out — yearly, quarterly, or monthly. Some prefer to get one lump sum per year. Check
    with a professional adviser on specifics for your individual situation.
  • Use an annuity. An annuity places a lump sum of money with a financial institution, and in exchange, you receive a guaranteed monthly
    amount for the rest of your life. Annuities can be a good choice for anyone for whom RRSPs are the primary income source or who may have a defined contribution pension from their employer that will pay out as a lump sum. There are many options with annuities so talk to a professional financial planner for the annuity that works best for your situation.

Some people find that when these withdrawals start, they don’t need the funds for their daily budgets. If you haven’t yet maxed out your Tax-Free Savings Account, Harcourt suggests this is a great place to put those funds until you need them. The funds will be invested, continue to grow, and you can take them out tax-free whenever you need them. The TFSA also has no upper age limit so you can keep it for life if you wish.

Which way makes sense for you? It will depend on your priorities: certainty versus control, guaranteed monthly payments versus something in the bank. As a family, it also depends on your other sources — for example, whether you’re accessing two pensions or one.

For those looking for harmony in their financial decision making, talk to a professional financial planner to help walk you through your options. This is never a decision you need to make on your own.