Planning your income as you approach retirement is quickly becoming one of the most important and overlooked aspect of financial advice.
The entire financial system is setup for clients to make contributions to their investments (which in turn generate commissions for financial institutions) and there really isn’t a huge incentive for them to sit down with you and develop a playbook for how you might eventually start to draw down on those assets.
So let’s do that.
For most people approaching retirement, they’ve become used to relatively steady and predictable employment income for years. I’ll just say from the get-go, transitioning away from that income stream to one that relies on a mix of investment income and government benefits is a huge challenge and again, something that is often overlooked.
For most people, their income after retirement will include at least a few of the following:
Canada Pension Plan (CPP) withdrawals
Old Age Security (OAS) payments
Tax-Free Savings Account (TFSA) withdrawals
Company sponsored retirement plans (DC plan)
Life Income Fund (LIF)
Defined benefit pensions plans
Figuring out how much to draw and from which accounts and in which order and how that changes over time, is specific to every household but as an example, lets look at an example with a two income household with partners currently 61 years of age. Both partners plan to retire at age 65 and have the following investments:
Collectively, their expenses are $65,000 per year and they have a $50,000 mortgage they expect to pay down before entering retirement.
Here’s a visualization of how and when they might receive income now, through retirement and assuming they live to age 95.
Ages 61-64: The orange bars represent their employment income, which is the sole source of income for the household as they approach retirement
Age 65-69: CPP (light blue) and OAS (black) kick in, along with withdrawals from their LIF.
Age 69: RRSP withdrawals begin
Age 71+: TFSA withdrawals stop and RRIF withdrawals become mandatory
It’s worth pointing out that even small changes to your account balances, household spending, or even life expectancy can have big changes on determining the optimal solution for your retirement income needs.
Additionally, government benefits from the Guaranteed Income Supplement (GIS), Federal GST/HST credit, or Registered Disability Savings Plan (RDSP) may be applicable to your situation and also included in your income mix
Having this income available to you as you approach retirement needs to be part of the service your financial advisors provides. If it isn’t, or your unsure about your financial situation, speaking with an advice-only financial planner that provides this level of detail can save you thousands of dollars and confusion when it comes time to juggle your various retirement income sources.