For many people, retirement represents one of the most significant financial transitions of their lives. After decades of receiving a regular paycheque, the certainty of employment income is replaced by the responsibility of managing the wealth that has been accumulated over a lifetime.
Our role in retirement planning is to help families make that transition with confidence. We work with clients to determine how their accumulated assets, pensions, government benefits, and other sources of income can be coordinated to provide a sustainable retirement income—while also considering the tax and estate implications of those decisions.
As retirement approaches, clients often find themselves facing a number of important questions:
What is a RRIF, and when should I begin drawing from it?
Which option under my employer's pension plan is most appropriate for my circumstances?
Should I begin receiving CPP early, or would it be better to defer it?
How can I structure my retirement income to minimize taxes over my lifetime?
How can I preserve more of my estate for my children and grandchildren?
If I own a corporation, how should my corporate and personal assets be coordinated as part of my retirement plan?
There is no single answer to these questions. The appropriate strategy depends on a client's income, assets, family circumstances, health and longevity considerations, tax position, and objectives for their estate.
The following example illustrates the type of planning considerations we regularly work through with clients.
The Clients:
Mary is a teacher preparing to retire at age 60. Her employer’s pension provides several options on ways to receive her pension income, including a bridge benefit until CPP begins at age 65, when she must retire at the latest.
Mary is married to Jas, and they have children and grandchildren. Mary and Jas each have RRSPs and TFSAs, as well as a modest joint non-registered investment account. Jas is 58, does not have an employer pension, and intends to work for another two years.
Their Objectives
Mary and Jas want to:
Maintain their current lifestyle throughout retirement
Ensure that the surviving spouse remains financially secure
Leave an inheritance for their children and grandchildren
Manage their tax obligations efficiently during retirement and as part of their estate plan
The value of planning is not simply in answering the immediate questions. It is also in identifying the questions that need to be considered before important financial decisions are made.
For Mary and Jas, these included:
Which pension option provides Mary with an appropriate balance between current income and financial security for Jas?
Should Mary begin CPP early, and if so, how should those payments be used?
How much additional saving should they make during Jas’s final two years of employment?
How should their RRSPs, TFSAs, pension income and non-registered investments be coordinated?
What withdrawal strategy will provide their desired retirement income while minimizing the tax liability of their estate?
Coordinating Pension Income
Employer-sponsored pension plans frequently provide several options for receiving benefits based on if one is making a choice with individual or joint life considerations.
In Mary's circumstances, we recommended the Joint and 100% Survivor Pension option. While the precise economics of each pension choice must be considered in the context of the client's circumstances, this option provided Mary and Jas with an appropriate balance between retirement income and the protection of the surviving spouse.
The objective was not simply to maximize Mary's pension income during her lifetime. It was to help position the pension continued to serve the couple's broader retirement objectives, including financial security for Jas should Mary predecease him.
CPP and Retirement Savings
We also considered the timing of Mary's CPP benefits. Given the couple's overall financial position and retirement objectives, we recommended that Mary begin receiving CPP early and direct those payments toward their investment savings.
This approach allowed the couple to retain greater control over those funds and incorporate them into their broader retirement and estate plan.
At the same time, we worked with Jas to determine the level of additional retirement savings required during his remaining two years of employment. The goal was to help position his eventual retirement income so that it complements Mary's pension and provide the couple with sufficient resources to maintain their desired lifestyle.
Income Splitting
Income splitting can also be a vital component of retirement planning. Where eligible, spouses can allocate certain pension income (including CPP, RRIF, employer pension, etc.) between them for tax purposes, potentially reducing the family's overall tax burden.
The rules surrounding pension income splitting can be complex and should be considered with a client's accountant or other tax professional before implementation.
Mary, Jas and Their RRIFs: Understanding the Registered Retirement Income Fund
A RRSP must be converted to a RRIF by the end of the calendar year in which the account holder turns 71. A RRIF continues to provide tax-deferred investment growth, but unlike an RRSP, it requires the account holder to withdraw a prescribed minimum amount each year. Withdrawals are included in taxable income. Clients can choose to withdraw more than the required minimum.
For many retirees, the question is therefore not simply how much do I have saved? But rather how should I draw on those savings over the course of retirement?
The Estate Planning Consideration
A significant RRIF balance can have important tax consequences at death. In Mary and Jas’ example, the remaining value of a RRSP or RRIF is included in the death of the second spouse’s income on the terminal tax return.
For Mary and Jas, we therefore incorporated a strategy of withdrawing more than the minimum required from their RRIFs during retirement and redirecting those funds to their joint non-registered account and TFSAs. This approach may result in an increase in taxes being paid during their retirement years. However, it reduces the chances of taxes being owed at the highest marginal rate, when the entire account is depleted in the year of death. Our expectation is that their RRIFs would be substantially depleted by their mid-80s. At that point, their retirement income could increasingly be drawn from their non-registered investments and, where appropriate, their TFSAs.
The objective is not simply to minimize taxes in any one year. Rather, it is to manage the family's lifetime tax burden and maximize the amount ultimately available to their beneficiaries. Ideally, Mary and Jas would enter the later stages of retirement with their estate consisting primarily of assets such as their home and TFSAs, which can generally be transferred to beneficiaries with more favourable tax treatment.
Planning for the Whole Retirement
Mary and Jas' situation illustrate why retirement planning extends well beyond determining whether a client has "enough" money to retire. The decisions surrounding pensions, CPP, RRSPs, RRIFs, TFSAs, taxable investments and estate planning are interconnected. A decision that appears attractive from an income perspective may have very different consequences from a tax or estate perspective.
Our role is to look at these decisions collectively and develop a strategy that reflects the client's priorities—not only for the first year of retirement, but for the decades that follow. Each family's circumstances are different. The most effective retirement and estate plans are therefore built around the individual, their family, and the legacy they intend to leave.
Jack Fournier, BSc, FMA, CIM®
Portfolio Manager | iA Private Wealth
Insurance Advisor | iA Private Wealth Insurance Agency*
700-609 Granville St. Vancouver, BC
p: 604 895 3348
jack@beaconwealthpartners.ca
Travis Kidson, BSc, CFP®, CIM®
Portfolio Manager | iA Private Wealth
Insurance Advisor | iA Private Wealth Insurance Agency*
700-609 Granville St. Vancouver, BC
p: 604 895 3486
travis@beaconwealthpartners.ca
This information has been prepared by Travis Kidson and Jack Fournier who are Portfolio Managers for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Managers can open accounts only in the provinces in which they are registered.
iA Private Wealth Inc. is a member o the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
*Insurance products are provided through iA Private Wealth Insurance Agency which is a trade name of PPI Management Inc. Only products and services offered through iA Private Wealth Inc. are covered by the Canadian Investors Protection Fund.
Beacon Wealth Partners is a personal trade name of Jack Fournier and Travis Kidson.