Friday, October 4, 2013

Fine tuning withdrawal strategy during retirement

Balancing the financial books in retirement can be tough. Why? The world is a tough place. Need I say more?

In just a few short years my wife and I will have to convert our RSPs to RRIFs. At that time it will become increasingly difficult to live on our dividend income alone. Why? Because the government stipulates the minimum withdrawal at age 71 is more than 7 percent.

We could, of course, simply convert our RSP savings into annuities or remove all our RSP savings and pay the tax. The annuity answer is not that appealing as it would lock my wife into a fixed payout for many years -- possibly decades -- all the while inflation would be diminishing the value of the annuity income. (I say it would-lock-my-wife-in as I have a failing heart and see little reason to believe I'll see 75, let alone 90.)

Withdrawing all the money seems foolish as well. The tax hit would be enormous. That leaves RRIF conversion as the only reasonable option in my book. Clearly, we must find the best approach to removing not only dividend income but some of our investment principal annually to meet the legally imposed withdrawal regulations.

Many of the Canadian banks post RRIF withdrawal rate tables. Here is a link to the TD Canada - Trust Retirement Income Options page.

One's first thoughts one has on seeing these tables and the increasing percentage of money that must be withdrawn is to think one's income must increase, at least in the early years of the RRIF. But this isn't necessarily true. These large withdrawals immediately attack one's principal and the toll this takes on one's portfolio is immediately apparent. Check out this calculator posted on TaxTips Canada.

Clearly, simply considering RRIF withdrawls is not enough. To know the whole story one must also look at annual savings after all expenses and taxes are paid. As long as one has available headroom, putting this excess in a TFSA seems reasonable. I envision a shrinking pot of RRIF funds and a growing pot of TFSA funds.

My goal is to generate enough money so that my wife and I can live together into our mid-70s in comfort. At the same time, I want to leave my wife in a position to live well into her 90s free of financial worries.

It is time to turn to Excel and start work on a spreadsheet. I'll keep you posted. Cheers!

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