The Retirement Income Puzzle
It used to be that you would work for the same company for your entire career, and when you hit 65, you filled out your pension documents, had a big party, and headed off into the retirement sunset and you were good to go. Pension payments – both company and government – for the most part covered all retirement income needs.
Now, in addition to government benefits, we are likely to have multiple sources of savings and investments to draw income from.
How do you solve the puzzle of integrating all these sources to achieve the income you desire, while minimizing your tax burden and maximizing your tax credits?
You’ve already decided on the amount of monthly income you’d like to have in retirement – the minimum you need to cover essentials like food and housing, plus some fun money. That number is your target.
You also know the various sources of income you’re counting on as a result of your hard work, diligent saving, and employee and government benefits.
Now, let’s put it together.
The first puzzle piece is your Canada Pension Plan entitlement. The average monthly benefit right now (2018) at age 65 is $666.56. The next piece to fit in is your Old Age Security payment of $596.67. That was easy, wasn’t it? Well, for the “average Canadian” it was, anyway.
If you’re one of the 4.4 million Canadians with a defined benefit pension plan, the next puzzle piece will be fairly easy for you, too, since all you need to do is pull out your pension statement, draw your finger across the line, and see your monthly benefit amount conveniently printed out for you.
Now the puzzle gets tougher. You have the weirdly shaped pieces that don’t quite fit so easily into place, and aren’t as definite as the CPP, OAS, and DB plan pieces that came before. You need to create the rest of your desired income out of your carefully saved collection of accounts. You might have some money in a defined contribution plan at work, an RRSP nest egg, LIRA, and non-registered money that you’ve saved up over the years, plus a flourishing TFSA account. You probably have a spouse with an equally spread out set of accounts.
Make the plan work for you
How do you establish an income plan that will be tax efficient, last your lifetime, and perhaps leave some money to your estate? Which income streams should be accessed and in what order? Which assets should be used first, and which should be deferred for later use?
There are a lot of other decisions to make.
- Do you take early CPP benefits and let your investments grow?
- What about tapping in to your RRSP/RRIF and delaying government payments to age 70?
- Your company pension plan may give you the choice of monthly payments for life, or take a lump sum commuted value.
- How do you structure your investments to reduce market risk and still give you the cash flow you need?
- Would you use a portion of your retirement savings to purchase an annuity?
There is no one right way to structure an income plan because there are too many variables and everyone’s circumstances are unique. Income requirements in retirement will depend on your age and your spouse’s age, whether you will continue some sort of employment, your health, the amount of pension income you can expect from various sources and how much you have saved.
It can be a complicated process. A financial planner can help you pull it all together and develop a plan custom designed for you if you need help.
The bottom line
You’ve spent decades building up your retirement nest egg. Now you need a plan to get the most out of your assets going forward, and help you achieve all the things you wish to do in retirement.
Deciding on the optimum time to take benefits and calculating how much lifetime income you can sustainably withdraw from a basket of investments with different withdrawal rules and tax treatments takes some fine maneuvering and finessing.
We’ll explore all the possibilities in future posts.