STRETCH IT OUT
There are steps retirees can take to draw down on their retirement savings, writes Ellen Roseman,
I’m waiting for my 2017 tax return to be processed. That’s because I’m expecting a large refund, which I plan to save and use for future tax payments.
Taxes are a huge issue for me since I took a retirement package in late 2015 and started writing a freelance column for the Toronto Star.
In 2016, I had multiple streams of income from selfemployment, pensions and investments. Much of it was not taxed at source, leading to a five-figure tax bill in April 2017.
I had to pay quarterly tax instalments, based on my 2016 income. But since my income was lower in 2017, I’ll get a nice refund (soon, I hope).
Becoming a self-employed contractor was a major shift after spending 45 years as a full-time employee with taxes deducted at source.
There were so many decisions to make.
When do you apply for Canada Pension Plan retirement benefits?
Under new rules, you can wait until you reach age 70 and receive a CPP payment that is 42 per cent more than if you started at 65.
If you work past 65, do you want to keep contributing to the CPP?
Under new rules, you can opt to continue participating in the CPP once you start receiving a pension. Your contributions go toward post-retirement benefits that increase your retirement income.
When do you apply for Old Age Security?
Under new rules, you can delay receipt of the OAS pension for up to five years after you become eligible at age 65. Your payments increase by 36 per cent if you wait until age 70.
What do you do when you turn 71 and have to collapse your RRSP?
You can cash out your whole RRSP at once, but the tax bite is high. You can put your aftertax RRSP proceeds into a taxfree savings account (TFSA), but the contribution limits are fairly low.
Most people roll over their RRSP to a registered retirement income fund (RRIF). This requires withdrawing a specific percentage of the assets each year and paying full tax on the withdrawals.
You can also use your RRSP to buy an annuity, a life insurance product that pays a guaranteed income until you die. Annuities offer the security of never outliving your money, but are unpopular at a time of historically low interest rates.
With so many decisions to make, where do you go for answers? Can you get the advice you need from banks, investment dealers and mutual fund sellers?
I wish this were the case. But financial professionals focus more on helping you save for retirement than helping you unwind your retirement savings.
Helping you switch from building up your savings to drawing down your savings in a tax-efficient manner — a process known as “decumulation”— isn’t a skill that most advisers have been trained to perform.
What about books? There aren’t many on this topic, but one I like is Winnipeg adviser Daryl Diamond’s book, Your Retirement Income Blueprint, now in its second edition, which I endorsed in a column in 2012.
A 2018 book I like even better is Retirement Income for Life by Frederick Vettese, chief actuary with pension firm Morneau Shepell in Toronto for 26 years.
“Drawing down one’s savings in retirement is something very few retirees do well, even with the help of professional advisers. Some retirees outlive their money,” Vettese says in the preface.
This wasn’t a mainstream issue until recently, he notes. But with more than 1,000 Canadians turning 65 every day, cultivating good decumulation practices has suddenly become an urgent matter.
Drawing down personal assets is hard to do. It makes one feel financially vulnerable, he says, “a grim reminder not only of our dwindling influence in this life but also of our own mortality.”
Vettese is a contrarian. In his previous books on retirement — one with co-author Bill Morneau, now Canada’s finance minister — he talked about the fact you can live on half the income you had while working, contrary to the industry’s contention that you need 70 to 80 per cent.
In this one, he uses the example of a real-life couple, whom he calls Carl (age 65) and Hanna (age 61), who head into retirement with a total of $500,000 in an RRSP plus $50,000 in TFSAs. Will it be enough to last for life?
He outlines five strategies to extend their savings: Reduce investing fees. Defer the CPP pension. Buy an annuity. Use a dynamic spending approach. Consider a reverse mortgage to provide much-needed income late in retirement.
Some of the five enhancements are no-brainers, he says. Some you may not like (deferring CPP and buying an annuity). And the last one (borrowing against your home equity) may be unnecessary if all goes well.
Vettese’s book is original and extremely useful, even for those who don’t fit the profile of Carl and Hanna. You will learn about how to draw down your assets and why your financial adviser might not like the specific steps he recommends.