To calculate the minimum withdrawal, the government takes the total value of one's RIF at the end of the year and multiplies this end-of-December amount by the percentage withdrawal demanded by the age one has attained as of January 1st. If your spouse is younger than you, you are allowed to use you spouse's age rather than your own for determining the withdrawal rate. Whatever you decide, think carefully, the decision is permanent.
The advantage of using a younger spouse's age when calculating the withdrawal is that the amount withdrawn is less when using the younger spouses age. At age 65 one must withdraw four percent but at 66 one must withdraw 4.17 percent. I let my wife's age determine my withdrawal rate but now that I am making in-kind withdrawals, I'm not sure that using the younger spouse's age is the best approach. I'll leave that for you to decide.
When one reaches the age of 70, one must remove fully five percent of one's total RIF. This is a lot and it only gets worse with each passing year. Investing For Me has posted a table showing percentage withdrawals increasing with each passing year.
Why do I see five percent as a lot to withdraw? Simple. The safe withdrawal rate is usually said to be no more than four percent. Withdrawing more than four percent annually runs the risk of depleting your RIF. Of course, this is the government's goal. They want you to deplete your RIF in retirement. In 2015 the federal Conservatives backed off a little on this forced depletion but it is still occurring but at a reduced rate. Whether these new, reduced rates will be retained by the new Liberal government is yet to be determined.
My solution to this forced depletion of my registered retirement portfolio is to make in-kind transfers from my RIF to my TFSA. I will continue these transfers as long as there is ample headroom in my TFSA. Eventually, I'll run out of TFSA headroom. At that point I'll open an unregistered self-directed account and move dividend paying Canadian stock into that account.
The in-kind transfers satisfy the government demand for a minimum withdrawal but keeps the money still invested. There is no withholding tax when the transfer is made as long as only the minimum withdrawal is transferred. Be aware that this transfer of stock, bonds or mutual funds is income and tax must be paid when the year's income tax is due. Depending upon when you make the withdrawal and when you pay your taxes, you may have up to about fifteen months to accumulate dividends to put towards paying the tax.
Say you made an in-kind withdrawal of $10,000 or 555 shares of Dream Office REIT from your self-directed RIF. By the time the tax was due you would have accumulated $1554 in dividends plus a small amount of interest. If, like many retirees, you pay a tax rate of about 15 percent, the dividends will cover the income tax to be paid. Talk about boot-strapping.
Because the dividends accumulated in a TFSA, there is no tax owing and the withdrawal will give you much needed increased headroom in the year following the withdrawal.
Unfortunately, this transferring of investments has not helped us pay our immediate bills. For this we return to our RIF and remove exactly one year's worth of accumulated dividends. With any luck this will be at least four percent of your RIF. There is a withholding tax on this withdrawal. If the withdrawal is $15,000 or more, expect to see the government withhold 30 percent. It is a lot but with a little luck you will get a big chunk of it back as a tax refund the following year.
Look at what you have achieved with this approach:
- This approach satisfies the RIF minimal withdrawal rule without removing the investment from your overall portfolio.
- This removes an amount to cover day to day expenses but does so in a less restrictive manner than simply removing the minimum amount demanded from your RIF and using it to live.
- As you transfer investments from your RIF to your TFSA, a larger and larger share of the dividends used to pay day to day expenses will be tax free. A welcome bonus.
- Each year your RIF will shrink by an amount equal to your minimal withdrawal plus your cash withdrawal. This is good. As your minimum withdrawal percentage increases annually, the amount on which the withdrawal is calculated shrinks. If it doesn't shrink, it is because your investments are doing awfully well. Don't complain.
- The dividends removed to live will increase the headroom in your TFSA in the following year. You can put this increased headroom to good use when transferring dividend paying stocks over to your TFSA from your RIF.
- When you run out of headroom in your TFSA, as you most certainly will, open an unregistered self-directed account. The dividends will be taxable but as long as they are appropriate dividends from a Canadian corporation, this income will be taxed at a rate much lower than your usual rate.
There is one glitch in the above. If some of your pension savings is in a LIF rather than a RIF, there is not only a minimum withdrawal that must be made, there is a withdrawal ceiling, a maximum withdrawal rate. For instance, in Ontario at 70 years-of-age one can only withdraw 3.22 percent over the minimum withdrawal demanded. This ceiling only exists for LIFs. It does not apply to RIFs.
If you do not have all your retirement investments in a LIF, you should be alright. And there is no reason to to be caught in such a predicament. When you create your LIF from your Locked-in RRSP, you are allowed a one time only unlocking of up to 50 percent of your locked-in plan. The result is half your retirement money in your SDLIF (self-directed LIF) and half in your SDRIF.
I found financial advisers did not want to discuss the in-kind transfer of funds from RIFs and LIFs to TFSAs and unregistered accounts.I even found banks that did not want to admit that such in-kind transfers were even allowed. I have found TD Waterhouse to be quite knowledgeable. Originally, I had my retirement investments spread evenly between two banks. The TD was a delight and the other was a pain. I cancelled my accounts at the one bank and the TD covered the transfer costs of about $300 for two accounts.
I'm sure some of you are wondering how it is possible to earn more than four percent in this present low-interest rate environment. Some years ago a reporter at the local paper, The London Free Press, warned that retirees may find themselves eating pet food because of the low interest being paid on savings. So far, since I retired in 2009, I have found this fear to be groundless. Some of my investments and the associated yields:
- Dream Office REIT: 12.31 percent
- Norbord Inc. : 1.45 percent (but it is up 14.24 percent since I bought it)
- Royal Bank of Canada: 4.15 percent
- Sun Life Financial Inc.: 3.50 percent (and it is up 110.31 percent since purchase)
- CIBC Monthly Income fund: 6.05 percent (sounds good but I don't advise buying)
The above is just a sample of the mix of stuff into which I have shoved my retirement funds. I find diversity gives me confidence and confidence allows me to sleep at night. I'm not greedy. I just want to pay my bills. So far, six years into my retirement, I see no problem keeping my budget balanced leaving the pet food for the pets.
I wondered how much the reporter who wrote the piece about being unable to save for retirement has done in the intervening five years. I do know this reporter makes enough to save at least $5000 a year toward retirement. If only $5000 had been set aside five years ago and another $5000 saved annually, today there could easily be $45,750 saved.
Don't believe me? Check the info below. Click on the image to enlarge. I put half the reporter's savings into the TD Monthly Income fund and the other half into the TD U.S. Index e-Fund. These are very conservative investments. I have both of these in my retirement portfolio. And adviser at the TD warned me to never go without expose to the American market. He was right. The reporter not so right.