Are you about to make the leap from work mode to retirement living and so going from a guaranteed salary to drawing down your savings and living off of pension income? If so, be prepared, as this tends to be a jarring time for most retirees. No longer are you focused on accumulating your wealth but instead, you will be depleting it. Now is the time when the advice of your financial advisor becomes invaluable, especially during the five years prior to retirement and the first five years of retirement. Small mistakes can have big financial consequences.
However, with a bit of planning, you can minimize the number of pretax dollars you will need to withdraw to maintain your lifestyle to have a comfortable retirement. Here are some tips to help you take the strain off your savings:
1. Use Income Splitting to Minimize Income Tax Payable
You and your spouse or partner can use income splitting to equalize your household income (or make it closer to equal) and avoid paying more than you need to in taxes. Each of you can also take advantage of a number of tax deductions, such as the Personal Amount, and the Age Amount (if either of you were age 65 or older on December 31 of the tax year). You may also be able to take advantage of two Pension Credits (one for each of you).
2. Use Registered and Non-registered Assets Together to Provide Income
Some of your sources of income in retirement are fully taxable, such as:
- Canada Pension Plan Benefit Payments
- Old Age Security Benefit Payments
- Registered Retirement Pension Plan (RRSP) withdrawals
- Registered Retirement Income Fund (RRIF) withdrawals
- Defined Benefit Pension Plan payments
- Interest Income
Other sources of income, such as dividend capital gains income, have certain benefits that will lower the tax rate you pay on them. Your goal should be to plan your retirement income sources so that you are bringing them into the picture at the lowest possible tax rate. A financial advisor can help you determine the best formula for your needs and goals.
3. Make Sure You Have a Flexible Income Stream in Retirement
Since Canadians are living longer (and longer in retirement) than previous generations, their needs will change over the years. For many Canadians, the early years of retirement may include part-time work or starting a business as well as drawing from savings and collecting government benefits. This is the time when you may find you need a higher level of discretionary income to pursue your lifestyle ambitions.
Later on, your income needs may be reduced. Your retirement income plan should reflect this eventuality. Take the time to draw up a realistic budget that outlines the amount of income you will need to cover your basic needs. You may find that making your assets last over several years will be less challenging than you originally thought.
4. Buy Insurance to Help Protect Your Retirement Savings
Long-term care and critical illness insurance can be part of a good overall financial plan that will help you stretch your pretax dollars. Long-term care insurance will pay a benefit if you need to be looked after in a nursing home or a similar facility. Some policies will pay for home care so that you can get assistance with activities of daily living (feeding, bathing, dressing, using the bathroom, etc.).
Critical illness coverage pays out a cash benefit if you are diagnosed with a covered illness. You can use this money for medical treatments, to pay bills, or any other purpose. Both types of policies will help to preserve your retirement savings.
Drawing down your assets involves more than just ensuring that you have enough money to cover basic and lifestyle expenses, it also involves devising a plan to make certain you take money from the best sources so that that you are not bumping yourself into higher and higher tax brackets.
Do you have questions about maximizing your pretax dollars in retirement? As an experienced financial advisor, I can help you find the most effective strategy for your needs. Please contact me for a personal consultation.