The retirement financial planning tricks of the trade is not a long list. There are a few things you can do to greatly boost your retirement income, while you manage risk. The RRSP / RRIF meltdown might be the most useful retirement ‘hack’. The strategy entails spending down your RRSP funds at an aggressive rate, starting in your early 60’s to enable the much higher CPP and OAS payments that you will receive at age 70. If you retired at age 65 the meltdown could start at 66 and see you through to age 70 as you delay CPP and OAS. Your retirement cash flow plan will lay out the exact strategy that suits you best. There is no one-size meltdown that fits all.
Here’s how I describe the RRSP / RRIF meltdown at Retirement Club for Canadians.
The RRSP meltdown is the process of drawing down your RRSP/RRIF early in retirement in the most tax efficient manner. The meltdown allows retirees to delay the government benefits (CPP and OAS) for the much greater benefit payments. For example, CPP increases by 42% from age 65 to 70, while the OAS payments increases by 36% for the same period.
Here’s a very good table courtesy of Aaron Hector of Tier Wealth that frames the CPP enhancement.
The RRSP / RRIF meltdown for most Canadians
According to financial planner Adam Bornn of Parallel Wealth The RRSP meltdown strategy will be a benefit to about 99.9% of Canadian retirees. Adam offers this wonderful explanation in a YouTube video …
In the example given for a couple in Canada they collected hundreds of thousands of dollars more in CPP / OAS government benefits. Of course, the meltdown strategy works for single tax filers as well. Though the benefits for couples is considerable and perhaps unfair. They can income split employer pensions, RRIF amounts and even CPP in certain cases. They can create two equal income buckets that can greatly reduce taxes. At age 65 they can start with about $50,000 of income before taxes.
Related post: Don’t forget the spousal RRSP.
There are many considerations of course. Your ideal plan may be to take OAS at age 65 and delay CPP until age 70. There may be reasons for one spouse to take CPP at age 60 and the other to delay until age 70. Financial planning is personal and you will be best served to let your life plan shape your financial plan. It’s more than simply punching your investment account numbers into a retirement calculator.
The meltdown strategy can also:
- Ensure you don’t die with a fully taxable RRIF
- Avoid OAS claw back
- Build up tax and estate efficient TFSA accounts
- Build up tax and estate efficient taxable accounts
Risk and trading places
One of the great potential benefits of the RRSP / RRIF meltdown is that you are exchanging higher risk assets (RRSP portfolio) for lower risk or no risk assets (CPP and OAS).
Those government benefits offer inflation-adjusted income for life. That is pension-like income for many who don’t have an employer pension, or a generous employer pension. That’s a good trade in general terms. More pensionable income can offer a sense of security. More pensionable income can reduce the sequence of return (market) risk of our investment portfolio.
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But we will have to consider the risk of the smaller balances in RRSP / RRIF fund created by the meltdown strategy. For instance you greatly meltdown the RRIF by age 71, and that 71 year old spouse passes away soon, or within a few years. You would lose a significant amount or all of the spouse’s CPP and the full OAS. The core of your financial plan was enhanced CPP and OAS, and now that money (from the spouse) may have disappeared entirely, or mostly. And once again, the RRSP / RRIF accounts have been greatly reduced.
Survivor benefits
For CPP there is a small one-time survivor benefit payment ($2500), and then an ongoing monthly CPP survivor benefit, up to 60% (at age 65 and older) of the spouse’s CPP payment. The combined amount the surviving spouse can receive is capped at the CPP maximum (based on the age 65 maximum).
You’ve lost the ability to income split. Your marginal and effective tax rate is likely to go much higher to maintain a generous spend rate.
Managing the meltdown
Measuring the meltdown risk should be quite ‘easy’. The cash flow calculator will show you the estimated and potential funds available at each age. Does the income potential at age 73 cover the total lifestyle costs for a surviving spouse? You’ll know if you have meltdown risk.
You might then adjust the rate of the meltdown, and move to a slower meltdown. Perhaps this is where life insurance can perform a useful role for those who enact an RRSP meltdown. You protect each other from from an early death in the most vulnerable years. For example, you might use a term policy that expires at age 80 when the portfolio risk has been ‘removed’.
What is your experience with the RRSP / RRIF meltdown strategy? Any questions? Fire away in the comment section or hit Contact Dale at the top right of this page.
But be sure to understand this wonderful strategy, and be sure to run a retirement cash flow calculator.
More Sunday Reads
At the Globe & Mail, Ian McCugan reminds us that stock market bubbles can burst (sub required) and they they can run in 25 year boom and bust cycles. Ian suggests we might be due for a bust of sorts.
How to manage that risk? The good news is that a simple balanced portfolio works in retirement. We should be moving some of those wonderful stock market gains and profits to cash, bonds and gold.
Yes, you can KISS (Keep it simple stupid) in retirement.
The cash wedge
Many retirees also build up a sizable cash wedge. For example, they might have 5 years of total spending needs in cash. If the big crash comes, you spend the cash and don’t touch the equities in the investment portfolios. Or in a hybrid strategy the retiree pulls mostly from the cash pile.
I don’t mind the strategy at all. You’ll enter retirement with the mindset that the markets cannot throw you off your spending plans (your lifestyle) in the first few years of retirement.
Related read: Retirees get punched in the face.
Yes, everybody has a plan until they get punched in the face (by an angry bear market). Make sure you have a good plan that will help you ignore the bear(s).
De-risk and remove stock market risk
While none of this is advice, consider it all ideas and information for consideration, you can take the recent market gift and de-risk entirely. You can move to a very conservative portfolio that removes the equity sequence of returns risk . For example you might move to 80% bonds and cash and 20% equities. Pay attention to and manage capital gains and taxation in taxable accounts, of course.
Stock market risk? Poof! Gone.
But now the risk might be that you don’t have enough growth potential in your portfolio. Answer? You start increasing your equity exposure over time – a reverse equity glide path. Think of it as dollar cost averaging for retirees. It can work better than static allocation models. For example, a fixed 60-40.
At Findependence Hub the BMO asset allocation ETFs just got more accessible.
Stocktrades offers some Canadian steel stocks to fortify your Canadian portfolio.
At Booming Encore a look at estate planning … Balancing equity, love and legacy.
Dividend Hawk’s weekly review shows we shared in some dividends from Enbridge ENB-T and RTX.
MoneySense suggests that gifting money to your to child may be a better option compared to the cosigning of a mortgage.
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It is a series of monthly Zoom Presentations, newsletters, plus a secure and private online space where we learn, share ideas and connect with members. Here’s the Retirement Club overview page. This past week we conducted a retirement cash flow review and plan for a club member who thought she might be spending in the $60,000 annual (after taxes) area. The cash flow plan shows a safe spend rate is likely in the $90,000 to $95,000 range.
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