7 tips for planning your retirement withdrawals
To have a retirement that meets your expectations, it’s not enough to save and grow your money. It's also important to know how you'll withdraw funds from your retirement savings.
What is a withdrawal plan?
A withdrawal plan allows you to determine how you want to receive your retirement income, be it from your investments, private or government pension plans or the sale of a property. It must take into account the number of years you expect to spend in retirement, access to your savings and your expenses, to ensure you don't outlive your savings.
The challenge is to plan your retirement income to minimize your taxes. Tax optimization is the goal here, even if there are other aspects to consider.
Discover our 7 tips to help you set up your withdrawal plan and make the most of the money available for your retirement.
1. Minimize taxes when withdrawing your savings
A well-planned, customized strategy will help you determine the best withdrawal order for your situation, taking into account all your sources of income.
It's important to plan how you want to withdraw your retirement savings over time, taking into account the age at which you will begin to draw on them, your other retirement income sources, and your cost of living at retirement. Your tax rate and the tax impact specific to each savings vehicle should also be considered.
One thing you can use your withdrawal plan for is to allocate withdrawals between your registered plans and your other investments, based on the tax impact of each. For example, you should consider that:
- Withdrawal from an RRSP or other tax-deferred account, such as a voluntary retirement savings plan (VRSP), life income fund (LIF) or registered retirement income fund (RRIF) is taxable.
- Some forms of income, such as dividends and capital gains or proceeds from the sale of securities in non-registered investment vehicles, are taxed differently.
You should also be aware that all taxable amounts are added to your income and may affect your eligibility for certain income-based tax credits or programs (GST credit, solidarity credit, Guaranteed Income Supplement), not to mention partial or total clawback of Old Age Security when income exceeds a certain threshold.
2. Plan all your major expenses
Are you thinking about renovating your home, changing your vehicle or moving to Florida for a few months? It's important to include any significant expenses in your plan to avoid large withdrawals that could result in a higher tax bill and impact your investments or long-term retirement plan.
Inflation
Cost of living increases are inevitable, so they should be reflected in your withdrawal plan. To maintain your standard of living, you may need to plan for increased withdrawals over time. Talk to an advisor if you need help understanding how inflation affects your withdrawal plan.
3. Give yourself flexibility to deal with the unexpected
Since life is full of surprises, it's best for your withdrawal plan to make room for unplanned expenses. With that in mind, you should leave yourself some leeway or maintain your emergency fund.
Market volatility
You must also be careful not to underestimate your expenses and be overly optimistic about your investment income. Keep in mind that market performance, particularly at the time of withdrawal, can affect the value of the portfolio and the amount of future withdrawals.
4. Continue to grow your retirement capital
Just because your withdrawal plan is ready or you've started to withdraw money from your retirement savings doesn't mean you should stop investing. On the contrary, you can generate returns, even in retirement.
By updating your investor profile, you can be sure that your investments are always tailored to your situation and your needs.
5. Assess the tax burden upon your death
No one lives forever. That's why you need to make sure your finances are in order. The law provides that all your capital property (such as shares in an unregistered portfolio, buildings, etc.) will be deemed to have been sold at their fair market value (FMV) at the time of your death. The resulting tax consequences will be included in your income, in addition to the FMV of all the assets held in your tax-deferred plans (such as an RRSP, LIRA, RRIF and LIF) unless your surviving spouse is the designated beneficiary (where permitted) or heir or, in the case of the LIRA or LIF, benefits from the spousal priority provided by law. Your estate will need to make sure there's enough cash to pay the tax upon your death.
That's why it's important to think now about who you'll leave your assets to so you can use strategies to reduce or defer taxes payable upon your death and incorporate them into your withdrawal plan.
6. Review your withdrawal plan and adjust it as needed
Following your withdrawal plan is essential to its effectiveness, but it's also important to review it periodically. In the event of an unforeseen event, a change in situation or market turbulence, you'll be able to adjust the amount to be withdrawn or review your strategy to successfully maintain the planned withdrawal period. That way, you can carry out your retirement plans and try to make your retirement capital last as long as possible.
When setting up your portfolio withdrawal plan, you should also provide for a certain level of flexibility that would allow you to adjust withdrawals. There are various stages of retired life: some are more active and others less so, and expenses usually follow accordingly!
7. Talk to your advisor
Your advisor can help you prepare, implement and review your customized withdrawal plan. Don't hesitate to ask for help, wherever you may be in your retirement planning.
* The information in this presentation should not be construed as advice from Desjardins on legal, accounting or tax matters. Services may be provided by other Desjardins or external partners, as needed.