At what age do you apply for your pension? In what order should you pay out your assets? The answers to these questions will have a big impact on your financial options in retirement.
Retirement can bring up a lot of worries. In fact, we are moving from an active phase in which we receive a stable income from work to another in which we rely on our assets and pensions. TFSA, RRSP, RRIF, RRQ, PSV, employer pension funds… it’s easy to get lost. Which payout order is preferable?
Tax planning is essential
The payout phase marks the conclusion of many years of savings efforts. This needs to be carefully planned as our taxable income varies from year to year depending on the assets withdrawn. “When you withdraw from the TFSA, there are no taxes. On the other hand, if you make RRIF withdrawals, they are considered taxable income. In addition, you will lose the bonus if you apply for your QPP pension too early. That’s why careful tax planning is the key to optimizing your income in retirement,” emphasizes Jean-Philippe Vézina, financial planner and tax specialist in the Jean-Maurice Vézina team.
You should know that this planning is not set in stone and may evolve over time. “The best retirement payout plan allows you to optimize taxes but, most importantly, achieve your personal goals. Every situation is unique, the plan must reflect your reality,” assures Jean-Philippe Vézina.
Payout examples
Let’s take the example of Jacques, who plans to retire at the end of the year at the age of 63. His wife Lucie, 65, recently retired.
Jacques has an RRSP of $200,000 and a TFSA of $50,000. Lucie has an RRSP of $50,000, a TFSA of $90,000, and an unregistered investment of $100,000.
The estimated monthly QPP pension for Jacques is $821 and for Lucie is $650. They need an indexed monthly net income of $4,000 to pay their expenses. Jean-Philippe Vézina has put forward four scenarios.
Scenario 1:
If the couple cashes out the heavily taxed investments first, i.e. the RRSP/RRIF before the unregistered investment and the TFSA, they will run out of money before age 95 (shortfall of $100,500).
Scenario 2:
If the couple pays off the tax-advantaged investments first, deducting the unregistered investment and TFSA before the RRSP/RRIF, they will run out of money again before age 95 (shortfall of $51,100).
Scenario 3:
If the couple chooses a blended withdrawal strategy, simultaneously withdrawing amounts from the RRSP/RRIF, TFSA and non-registered bank accounts to maintain essentially the same taxable income throughout retirement, they will not only have enough money until retirement 95, but also a surplus of $25,000, a difference of $125,500 from the first scenario.
“Payout order is a very important variable to consider, but unfortunately it is often overlooked. A good withdrawal strategy ensures that no money is left on the table,” mentions Jean-Philippe Vézina, who also worked on a fourth scenario by changing the QPP withdrawal date.
Scenario 4:
If Jacques and Lucie were to defer their QPP pensions for five years at ages 68 and 70 respectively, they could benefit from the increase. Additionally, if they choose a mixed withdrawal strategy, they would have enough money until age 95 and there would even be a surplus of $248,200, a difference of $348,700 from the first scenario.
ADVICE:
● A recent study by the Department of Taxation and Public Finance at the University of Sherbrooke[1] shows that the combination of a lack of information and cognitive biases is leading too many Quebecers to claim their QPP pension too quickly, and that claiming this pension at age 60 is proving to be a costly decision. The only exception: people in poor health, whose age at death would be under 73 or who are expected to have a low pension income.
● Assistance from a professional can help you create a customized financial plan for retirement, whether that time is three, five, or even ten years away.
[1] https://cffp.recherche.usherbrooke.ca/quand-debuter-ses-prestations-publiques-de-retraite-les-avants-de-la-flexibilite/