How do we withdraw funds without running out of money?

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“Now that we’re retired, how should we be drawing income from our investments in the most tax effective way that will ensure we can maintain the lifestyle we want throughout retirement?” This is the question Walter*, 68, and Joanne, 67, have been grappling with for the past three years.

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“We cannot get a clear understanding of which accounts we should be drawing down from and in what order from our financial advisors,” said Walter.

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The Alberta-based couple started drawing Canada Pension Plan (CPP) benefits when they each turned 60. After tax, Walter receives $1,060 a month in CPP payments and Joanne receives $812 a month, as well as $206 a month from a locked-in retirement account (LIRA) currently worth $40,000. They are also drawing down $6,500 a month (after tax) from a retirement income fund (RIF) worth $836,000. They have another $686,000 in a spousal registered retirement savings plan (RRSP) that has not yet been converted to a RIF, as well as $322,000 in tax-free savings accounts (TFSAs) largely invested in a diversified mix of more than 50 stocks across sectors and geographies managed by a broker with their bank. They continue to maximize contributions each year. They also have $150,000 invested in a real estate investment trust (REIT).

They plan to defer receiving Old Age Security (OAS) payments as long as possible to prevent any clawback.

In addition to their investments, Walter and Joanne have downsized and own a home valued at $850,000, a $700,000 stake in a shared family cottage and two term life insurance policies valued at a combined $1 million that will mature in a few years. “Should we renegotiate at that time? Is it a good idea to have life insurance to cover death taxes and the capital gains implications of passing our estate on to our two adult children?” asked Joanne. “Or should we be giving our children their inheritance sooner rather than later?”

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Monthly expenses are about $8,600 and include $1,500 directed toward a travel fund to pay for the multiple large and small trips they take each year. That said, travel and unexpected costs can sometimes cause monthly expenses to exceed monthly income.

“Sometimes we think we should be drawing $8,000 (net) a month from our RIF but worry we might run out of money,” said Walter. “Can we afford to do this? Right now we’re working with a stock broker and tax accountant but neither one has been able to give us a clear strategy.”

What the expert says

According to Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, Walter and Joanne should have enough to support their lifestyle plus inflation for life.

“Walter and Joanne are spending $8,600 a month, or $103,000 a year after tax ($126,000 before tax). To provide this income for life with an annual return of seven per cent they would need about $1.8 million in investments. They have just over $2 million. They are 15 per cent ahead of their goal, which is a reasonable margin of safety,” he said.

They are paying about $23,000 a year in income tax now. This will rise to about $30,000 a year once they start their OAS, which he suggests they should both start now. Deferring it to age 70 gives them an implied return of 6.8 per cent a year, which is likely a bit lower than their investment returns, he said.

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To minimize tax, Rempel suggests they focus on income splitting and trying to stay in the lowest tax bracket. “They should be able to split all their RRIF and LRIF income on their tax returns,” he said, and recommended they look into splitting their CPP. “This will help them avoid having OAS clawed back.”

He suggests their best strategy is to try to keep each of their taxable incomes, including their OAS and CPP benefits, below $57,000 a year (which is taxed at the lowest rate) by drawing from their RRIFs or LRIF. “Their OAS and CPP would be about $21,000 a year each, assuming they income-split CPP. That means they should withdraw $36,000 a year each before tax (or $6,000 a month total) from their RRIFs and LRIF.

“This would mean they only pay 28 per cent tax or less on all their income and will save them about $10,000 a year income tax. Then withdraw the rest of what they need to pay for their lifestyle ($10,000) and to maximize their TFSAs ($14,000 a year) from their non-registered investments,” he said.

“Once their non-registered accounts are depleted, likely in about five years, they can start withdrawing the $10,000 a year from their TFSAs. At age 71, they will have to convert the rest of their RRSPs to RRIFs, which will lead to a higher minimum withdrawal and allow them to withdraw less from their TFSAs.”

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Deciding what to do with their life insurance policies, comes down to how much of an inheritance they want to leave their children, said Rempel.

“Their policies will be quite expensive to renew now that they are older. You still pay the same tax on death when you have insurance. It just means you leave a larger estate. Is it important to them to leave a larger estate? And regardless of whether the kids decide to keep or sell the cottage — which could be an inheritance of $750,000 each based on today’s values — they are highly likely to have enough investments to pay the capital gains tax.”

The bigger challenge is giving the kids an early inheritance. Since almost all their investments are in RRSPs and RRIFs, this would trigger a big tax bill. “What they could do is give them the cottage sooner. There would be capital gains tax to pay, but that should be far less than amounts from their RRIFs. My best advice is to make sure they have enough for themselves and the lifestyle they want, so that they never need anything from their kids.”

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Rempel recommends they work with a fee-for-service financial planner to create a comprehensive financial plan that will provide clear insight on exactly what to do, which can minimize the risk of running out of money.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll 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).

* Names have been changed to protect privacy.

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