By Dave Dineen
RRSP, QPP/CPP, TFSA, OAS, Employer Annuity: When you start withdrawing funds for retirement and the order in which you make the withdrawals will ultimately make a difference.
Isn’t providing you with an income in retirement as easy as turning on a tap and watching the money flow?
Unfortunately, that’s not entirely accurate.
Suppose you are about to retire and, through luck and careful planning, you are entitled to income from all significant sources of retirement income (see sidebar). Let’s also assume that, like many Canadians, you don’t start tapping into all the bases at once.
So in what order is it best to access your money so that your savings last as long as possible, are taxed as little as possible, and are sufficient? If you start drawing income from these sources one at a time (e.g. QPP/CPP first, then your RRSP, etc.), there would be 479,001,600 different possible combinations.
Ouch!
Sceptics will say that it is unrealistic to assume that you will receive retirement income from all possible sources. So what if you have no pension, no non-registered investments, no locked-in account, no home to use the equity in – and your spouse is in the same boat? Well, together, you have 87,178,291,200 different ways to start earning a combined retirement income.
Ouch again! It’s no wonder that Canadians have difficulty choosing how and when to receive their retirement income.
Consider your retirement income options.
Primary sources of retirement income:
Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)
Old Age Security (OAS)
Registered Retirement Savings Plan (RRSP)
Registered Retirement Income Fund (RRIF)
life annuity
Tax-Free Savings Account (TFSA)
Unregistered savings
Equity in your home
employment income
I invited Brian Burlacoff, award-winning advisor at Sun Life Financial, to offer a more straightforward way to approach the decision about which sources of income to tap into and when.
“When I talk to people who are thinking about their retirement income, I use an analogy that makes thinking easier,” says Burlacoff. Imagine a room in which barrels are stacked along the walls. The barrels are not all the same size, and a different label is affixed to each one. You have the “RRQ” barrel, the “REER” barrel, etc.
“Now imagine that each barrel is filled with water and has a tap. Think of the water in each barrel as if it were the money you have access to for retirement income.”
If you have a spouse, it helps to imagine your barrels along one wall and theirs along with another.
What about state pension benefits and defined benefit plans?
You cannot receive the QPP/CPP pension before age 60 and the Old Age Security pension before age 65.
If you are entitled to a pension under a defined benefit plan, rules also apply to when you can start drawing income from the program. Often, it’s wise not to use for state and defined benefit benefits until you need them because, as a general rule, the sooner you receive these guaranteed benefits, the lower the amount of the payment will be.
Determine your retirement cash flow
Some barrels have a red tap. Once you’ve opened it, you can never close it – payouts will always be made at a steady rate. In the case of barrels with a green tap, on the other hand, you can start and stop withdrawals at any time. There is also a yellow tap: you cannot reduce withdrawals below a certain level when you open them, but you can increase them.
Some taps control the debit of income, while others have a debit set according to the rules that apply to state or employer-sponsored pension plans.
