You’ve likely spent decades saving and planning for retirement, but do you have a plan for how to tap into your hard-earned savings? Potentially not. Too many Canadians overlook this critical step in retirement planning: withdrawing savings in a way that minimizes taxes and maximizes life after work.
Generating retirement income, even for high-net-worth Canadians, involves more than strategizing on when to take Canada Pension Plan (CPP) and Old Age Security (OAS) benefits or deciding the optimal time to convert an RRSP into a RRIF. Those questions miss the big picture, says Sean Harding, Senior Wealth Planning Consultant at BMO Private Wealth. It may be more important to focus on tax efficiency and the sequence of withdrawals than on higher returns. Smart planning, he says, can save or preserve significantly more wealth than uncertain investment gains, especially if you don’t assume additional investment risk.
It’s a challenge that cuts across income brackets, says Harding. “When you’re dealing with high-net-worth clients, the big questions aren’t much different from anyone else – they want to know they’ll be okay,” he says. “From a cash flow perspective, though, decumulation can be more complex.”
That’s because, with the rise of entrepreneurship and the decline in workplace pensions, many higher-net-worth individuals have a broader mix of assets to draw on in retirement. Their portfolios could include Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), non-registered investment accounts, plus real estate, other businesses and even art. All these assets could be sold to meet your retirement needs.
The countdown years
Properly withdrawing assets requires creating a drawdown strategy, which can begin up to a decade before your target retirement date, says Harding. It takes about this long to ensure your portfolio is properly diversified and matches your risk tolerance, which may change as you get closer to retirement.
Starting early also gives you the opportunity to make sure your assets can be withdrawn as tax-efficiently as possible, with certain strategies only available to you before retirement. For example, if you use registered and non-registered accounts, you may want to move assets that receive less favourable tax treatment, such as interest-bearing bonds, into a registered account. Of course, you’ll want to do that well before you start withdrawing.
Likewise, in the lead-up to retirement, you may want to put assets that come with tax advantages, such as dividend-paying stocks, into a non-registered account. As well, some families might smooth out their tax bills by income splitting, which could involve employing a spouse in a business.
The drawdown years
When you enter the decumulation years, you’ll begin withdrawing funds from your various accounts (or selling other assets) to fund your retirement lifestyle. You might also potentially give money to children, grandchildren and charities. For many, the goal is to keep the money growing at a steadier pace for spending and to leave a legacy for future generations.
In many cases, Harding says the families he works with want to further reduce their portfolio risk in retirement to maintain the wealth they’ve accumulated in their working years. “Sometimes in discussions with clients, we need to be straightforward and say, ‘You don’t need to be taking this risk. How much of a return do you actually need?” he says.
If you have a mix of assets, including pensions, corporate accounts, and registered and non-registered portfolios, you’ll want to consider which assets to draw from first. Harding often sees clients withdraw income from non-registered accounts first, allowing registered accounts to continue growing tax deferred. However, if you have other income streams, that approach may not work.
For instance, Harding says that if you expect a steady income from your business in retirement, it may make sense to start drawing from registered accounts before retiring. The goal here is to smooth out your income to avoid a big spike when you are eventually forced to draw on your retirement savings. The aim is to help you stay in a lower tax bracket and protect the claw-back of government benefits like OAS.
This strategy may also reduce your overall lifetime tax compared to waiting until later, as mandatory minimum RRIF withdrawals steadily increase as you get older. Taking higher RRIF payments and continuing to earn business income could come with a high tax bill.
“Eight times out of 10, I believe keeping Registered Assets tax sheltered as long as possible makes a whole lot of sense,” he says. “And then there are two times out of 10 where, if you put in a withdrawal meltdown strategy, it actually works out better for you.”
If you decide to sell your business, you could also trigger a significant tax bill. “We need to plan for that,” says Harding. “We could be looking at millions of dollars’ worth of taxes that are going to get owed, which can be a real eye-opener for the beneficiaries.”
Putting the final pieces in place
Once you have an idea of what your income needs are in retirement and have a clear picture of your income streams, you can start to think about questions around when to access your registered accounts. Depending on your tax situation, there may be times when converting your RRSP to a RRIF before the required age of 71 makes sense. You might choose to delay CPP and OAS benefits until more money is withdrawn from an RRSP and/or the corporation.
If you plan to give to charity as part of your planning, then donating securities, either directly or through your own donor-advised fund, is another strategy for philanthropic investors. “It’s a way of divesting those shares without triggering a capital gain,” Harding says.
Many investors also start giving money to their beneficiaries while they’re alive, not only for tax efficiency but to see them enjoy it. Often, the money is used to help kids make a down payment on a home, pay for a big wedding, or cover their grandkids’ education costs.
“We have clients who sometimes tell us, ‘I’d much rather gift my money with a warm hand than a cold one, so we build in gifting strategies while they’re alive,” Harding says.
“It’s the beauty of planning,” he adds, “The sooner that we get on it, the better, even if it’s still kind of loose, because you have the confidence of knowing that there are strategies that can be put in place.”
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