Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss our top five retirement income planning strategies.
Specifically, we will cover:
- How to determine your optimal CPP start date,
- The importance of proper asset allocation,
- How to properly use pension income splitting with your spouse or common-law partner,
- Steps to minimize the ups and downs in your portfolio,
- How to determine your retirement income withdrawal strategy,
- And lastly, a few action items for you to consider.
Hope you’re all doing well.
A few weeks back, my wife and I took some time to go fishing at Blackstrap Lake, just south of Saskatoon. We went during the week, which was super nice—the boat launch was quiet, and so was the lake. We caught a few perches, a walleye or two, and a nice pike. We took the pike home and cooked up some tasty fish tacos.
Now, if you like to fish, you might scoff at the idea of keeping a pike because of the bones, but I highly recommend trying the 5 fillet method for deboning your pike. It took me a few attempts to get the process down, but it works like a dream now! I’ll leave a YouTube link in the description for any of you outdoor types to have a look.
So, in today's episode, I’m going to unpack my top five retirement income planning strategies. There are many more strategies out there, so I tried to highlight the most common topics I come across with clients in my day-to-day work. Each of these strategies warrants its own standalone episode, so in the future, I’ll take the time to dive deeper into each one. For today, let’s keep it high-level and discuss these five retirement income planning strategies at a glance. Like I said, each of these will get its own episode in the future, so be sure to hit subscribe to make sure you don’t miss out.
Alright, so first off is choosing your Canada Pension Plan (CPP) start date. This decision is huge because once you make the choice, there’s no turning back. If you take it before age 65, your amount will be reduced, and if you wait until after 65, it will be enhanced. I’ve spent countless hours building financial projections for clients to help answer this question. It’s so common that in 2021, I wrote a book specifically on how to maximize CPP and your other government pensions.
If you’re hoping for a silver bullet answer to your start date question, I’m sorry to disappoint. Every client scenario I’ve worked through is unique to that family’s personal situation. There is no one-size-fits-all solution when it comes to this. So, I suggest starting by asking yourself a few questions to gain a sense of what may work for you.
Do you plan to continue to work past age 60? If so, it may make sense to wait.
How is your health? If you have a shortened life expectancy, you may want to consider starting early because once you pass away, your benefit stops unless you have a spouse or common-law partner who would receive a survivor benefit.
Do you have investments to provide an income in your early 60s? If so, delaying CPP will ensure a higher fixed monthly income in the future.
Is your spouse continuing to work? If their income can sustain your family’s lifestyle, it may be wise to delay CPP to enhance the benefit.
In general, if you have the ability to delay CPP, you will help to ensure a fixed increase in your monthly income for life. Start by asking yourself these questions and then work with a certified financial planner who can consider your personal situation to project potential future scenarios, including your withdrawal plan, CPP crossover date, and tax planning.
Next, let’s discuss ensuring you have proper investment asset allocation. In plain English, asset allocation describes the percentage of stocks, bonds, alternative investments, and cash in your portfolio. This can be further broken down into stock style exposure, stock sectors, bond maturities, and more.
Proper asset allocation during retirement should focus on two core areas:
1. Having the proper mix of assets suitable for your risk tolerance, time horizon, and investment objective. These assets should provide you with a reasonable risk-adjusted rate of return, reducing volatility and mitigating the emotional impact of market drawdowns.
2. Ensuring your asset allocation factors in your income needs and is positioned to provide 2-3 years of income not impacted by market changes. This is often referred to as bucketing or a cash wedge. I like to call this your war chest of short-term, liquid investments.
Proper asset allocation will help you sleep at night. Imagine you’re on the golf course and check some news headlines that are sure to impact the markets. You might wonder how this will affect you and your family. Because your portfolio is structured to provide a comfortable risk-adjusted rate of return, you’re confident your negative investment exposure is mitigated. Even if your investments are drawn down a bit, you can turn off withdrawals from these investments and shift to assets that were not impacted—your war chest of short-term, liquid investments.
Investing can be extremely stressful, especially if you don’t have these two core areas covered. Ensuring you do will help take the emotional strain out of the inevitable market ups and downs.
The third retirement income planning strategy is the proper use of pension income splitting. In short, pension income splitting involves notionally splitting your pension income with your spouse to reduce your household’s overall tax bill. When I say notionally, I mean you aren’t actually transferring money to your spouse directly. The pension income splitting occurs when you file your taxes and attribute some of that income to your spouse, who is presumably in a lower tax bracket. The goal is to reduce your household’s total tax.
Only certain accounts and pensions can be split, and there’s a difference based on whether you’re younger than age 65 or older. Think of it this way: assume one spouse has pension income eligible to be split of $60,000 while the other has an income of $30,000. Before splitting income, their household tax would be approximately $16,000 in Saskatchewan. If they split the income evenly, each paying tax on $45,000, their new household tax would be $15,000—a $1,000 reduction.
Pension income splitting becomes even more important when one spouse’s income approaches the OAS recovery tax limit of approximately $87,000 in 2023. A spouse can avoid the OAS clawback, which is an effective 15% increase in tax, by splitting eligible income back to the lower-income spouse.
Check your previous tax return to see if there’s an opportunity to save tax using this strategy. At our firm, we prioritize this kind of tax planning with clients every year, especially in the last quarter to get a full sense of income for the year and make a plan to optimize the situation and minimize the lingering tax liability of registered accounts.
The next retirement income strategy is to minimize the ups and downs in your portfolio. This is an extension of my asset allocation strategy but worth emphasizing. Reducing volatility will help alleviate emotional stress, so it’s important to have a strategy.
Advisors often use terms like standard deviation, risk, and volatility. The simplest way to think about it is like a roller coaster. A steep roller coaster with big ups and downs may be fun when you’re young, but as you get older, you might prefer something less aggressive. Applied to your investments, this analogy works well.
When you’re young, you can take more risk because you have time and aren’t withdrawing investments to live off of. When you’re older, you don’t have time for investments to recover from volatility as you’re withdrawing to live. This is why risk-adjusted, low-volatility investments are crucial to your retirement plan.
Let’s take an example with two investment portfolios. Both start at 0% return on January 1st and end positive with a 5% rate of return on December 31st. If you don’t have to sell any investments throughout the year, the choice between them shouldn’t matter much. However, if you need to withdraw money monthly, the first portfolio is like a roller coaster with lots of ups and downs, while the second is slow, steady, and boring.
At the end of the year, the retiree on the boring ride will likely be in a better position because, as they were withdrawing monthly, there weren’t huge swings forcing them to sell more of their investment to get the same amount of monthly cash. Adding alternative investments, such as private real estate, private credit, and private equity, can help lower the overall ups and downs in your retirement portfolio. This is especially important in accounts used to create monthly income, like RRIFs, PRIFs, and non-registered accounts.
If you have questions about these alternatives, I’ll be discussing them in future episodes. For now, visit our website, www.fundamentalwealth.ca, to learn more.
The last strategy is how to structure your retirement income withdrawals, often referred to as your withdrawal hierarchy. This involves looking at all your sources of income in retirement, such as CPP, OAS, work pensions, PRIFs, TFSAs, non-registered accounts, and more. Once you have all your current and future incomes lined up, consider them through your tax lens. Here are some things to think about:
1. What tax bracket are you in, and how will it change over time?
2. How will pension income splitting and other tax credits impact your household tax?
3. What is the looming tax bill for your beneficiaries?
There is no one-size-fits-all strategy here. There is a balance between deferring tax now to minimize taxes and maximize government benefits while also being aware of the potential for a pending tax bomb at last death. If you and your spouse both have large RRIF or PRIF accounts, at the passing
of the last spouse, these would be considered 100% taxable to your estate. For many with hundreds of thousands, if not millions, of dollars in these types of registered plans, there could be upwards of a 50% tax on the remaining assets.
A balanced, well-thought-out withdrawal order can help ensure a worry-free retirement, minimize your tax today, and reduce the tax burden on your final estate.
That’s all for today. Let’s jump into a few action items for today's episode:
1. If you are within 10 years of retirement and want to make an income plan, your first step is to reach out to My Service Canada to request a CPP estimate. This will help lay the foundation for your retirement income withdrawal plan and narrow down the CPP start date for you and your spouse.
2. Seek professional advice if you’re not comfortable making a plan yourself. The strategies outlined in this podcast represent only a fraction of the tax, investment, and retirement strategies available to Canadians. Work with a Certified Financial Planner who can consolidate these complexities to build a comprehensive retirement plan, not just an investment plan.
3. Enjoy the rest of your summer! My wife, son, and I are headed to the lake this weekend to soak in the last few rays before they’re all gone. I hope you and your family can enjoy some time together doing whatever makes you happy.
For links and resources discussed, please check out the show notes or visit retiringcanada.ca. Be sure to sign up for my weekly Retiring Canada newsletter.
And hey, when it comes to your retirement, don’t take chances.
Make a plan so YOU can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.