All retirees and near retirees need to run the numbers. They need to create an optimized retirement cash flow plan. A cash flow plan will show you the optimal time to take CPP and OAS, and then how to create income from your RRSP/ RRIF/LIFs, TFSAs, Taxable accounts, pensions and other sources of income. You’ll discover the most durable and tax-efficient approach for your retirement. A successful retirement cash flow plan often ‘finds’ tens to hundreds of thousands of dollars of ‘additional’ spending over the retirement period. A cash flow plan can bring peace of mind allowing you to spend with confidence. With a clear roadmap, you can enjoy your golden years without the constant fear of running out of money.
A recent Financial Facelift in the Globe and Mail caught my eye. The post put forth the core principles put in place when we create an optimized retirement cash flow plan. Those moves were articulated by Corrinna Paxton, a certified financial planner at Objective Financial Partners.
I had previously laid out those key cash flow plan moves in this post …
The simple strategies that set you up for retirement success.
I was curious about how much they might be able to spend. They were targetting $75,000 after tax in annual spending, but it was obvious that they would be able to spend considerably more.
It was an opportunity to quickly input the numbers into the MayRetire retirement calculator that we use at Retirement Club for Canadians. It would only take 10 minutes or so to input the financial details. I’d then go to work looking to discover how much they might be able to spend, paying attention to the financial planning playbook.
The Retirement Scenario
Here’s the details as put forth in the Globe & Mail. I have added a few sub heads.
Syed is 65 years old and Mandy is 64.
He has been self-employed for a few years, making $10,000 a year as a part-time trainer, while she earns $126,000 a year as a business manager. As well, Mandy has a defined benefit pension that will pay her $12,000 a year at 65.
They have two adult children, one still living at home, a mortgage-free house in Toronto and $1.8-million in investments. Their main question is whether they are well-positioned for Mandy to retire next year. Syed would continue with his part-time work for another two or three years.
They wonder what drawdown strategies they should employ for their registered retirement savings plans and locked-in retirement accounts. Their target retirement spending is $75,000 a year after tax, rising in line with inflation.
“Syed and Mandy have done many things right,” Ms. Paxton says. Their balance sheet is impressive: $3.1-million in net worth, no debt, substantial registered savings, healthy tax-free savings account balances and a mortgage-free home. “More importantly, their retirement spending goal of $75,000 a year after tax is modest relative to their assets.”
They wonder if Mandy is positioned to retire in 2027.
“Based on the information provided, I believe the answer is yes,” the planner says.
Assuming a conservative 4 per cent rate of return over a 30-year time frame, their portfolio could reasonably support about $75,000 annually after tax, Ms. Paxton says.
Yes they can spend, spend, spend
“Once Canada Pension Plan, Old Age Security and Mandy’s defined benefit pension are added, their retirement income should comfortably exceed the target, even after accounting for taxes,” she says. If Mandy continues to work, it becomes more of a personal choice than a financial requirement.
Their home also provides flexibility should health care or long-term care become a consideration later in life.
“Before Mandy gives notice, I would recommend preparing a detailed retirement cash flow projection that stress-tests their plan using poor investment returns early in retirement, higher inflation, and different longevity assumptions,” the planner says. “Retirement planning is about confidence under adverse scenarios, not just average ones.”
As retirement approaches, their investment strategy should shift from maximizing returns to creating reliable income. “I’d review whether their asset allocation is appropriate for someone beginning withdrawals and ensure they have sufficient cash or short-term fixed income to avoid selling equities during a market downturn,” Ms. Paxton says. As well, investment risk tolerance sometimes changes when people go from saving to spending.
Delay CPP and OAS
Next, the drawdown strategy. “This is where careful planning can add significant value.”
Both Syed and Mandy plan to delay taking CPP and OAS payments until age 70. “I support this strategy, assuming their health remains good,” the planner says. Delaying these benefits creates larger guaranteed, inflation-indexed lifetime income and provides peace of mind for retirees withdrawing from their investments in their 70s and 80s.
The years between retirement and age 70 create an excellent tax-planning opportunity for their registered accounts.
“Instead of waiting until age 71 to convert their RRSPs and LIRAs, I recommend converting at least a portion into registered retirement income funds or life income funds,” she says. This allows them to begin drawing registered assets while their taxable income is relatively low. They might try to plan to convert enough of their registered assets so the minimum withdrawal is in line with their cash flow needs.
Of note is that they may be able to unlock a portion of their LIRAs and transfer a portion to their RRSP/RRIF accounts for more flexibility in future withdrawals. The unlocking rules vary depending on the provincewhere the pension plan was registered.
The objective of early registered account withdrawals is to fill up their lower tax brackets each year rather than allowing their RRSPs and LIRAs to continue growing until mandatory withdrawals begin at age 72. This approach reduces future required minimum withdrawals and lowers the likelihood of paying higher marginal tax rates or triggering OAS recovery tax later in retirement.
Income splitting
Because Mandy has substantially more registered assets than Syed, it also makes sense to evaluate whether somewhat larger withdrawals should come from her accounts during the early retirement years, Ms. Paxton says. This can help equalize future taxable income between spouses.
“I would preserve their TFSAs for as long as possible. They provide tax-free flexibility for unexpected expenses, health care costs or years when additional cash is required without increasing taxable income.”
Syed and Mandy have done the hard part – they’ve accumulated the assets. The next phase is turning those savings into reliable, tax-efficient income. “In my experience, retirement success isn’t only determined by the size of your portfolio but how thoughtfully you draw from it,” the planner says.
Depending on how their investment and retirement accounts are invested, their greatest financial risk is unlikely to be running out of money. Instead, it is paying more tax than necessary over a retirement that could last 30 years or more.
With thoughtful sequencing of RRIF and Life Income Fund withdrawals, delayed government pensions and ongoing annual tax planning, they are well-positioned to achieve their retirement goals while maximizing after-tax income throughout retirement.
Consider the go-go years spending
“My recommendations would be: 1) Complete a detailed cash-flow analysis. Would they spend more now and less later? Some people travel in the initial years of retirement and stay closer to home in their later years. Stress-test the income need in different markets, inflationary environments and longevity scenarios.”
2) Develop a tax-efficient RRSP/RRIF withdrawal strategy between retirement and age 70 and work closely with a tax adviser to smooth future tax brackets.
3) Review survivor income and long-term care costs to ensure the plan works for either spouse well into their 90s.
Mandy and Syed’s situation
The people: Syed, 65, and Mandy, 64.
The problem: Are they positioned financially for Mandy to retire next year when she turns 65?
The plan: Draw up a cash-flow plan, defer government benefits, develop a tax-efficient drawdown strategy and review their investments to ensure they are suitable for their changed circumstances in retirement. Stress-test different scenarios.
The payoff: An understanding of how planning is an ongoing process that changes over time.
Assets: Cash $19,800; his non-registered portfolio $237,000; his TFSA $145,000; her TFSA $108,000; his RRSP/LIRA $476,000; her RRSP/LIRA $856,000; residence $1,300,000. Total: $3.1-million.
And remember, Mandy has a defined benefit pension that will pay her $12,000 a year at 65.
What MayRetire had to say
Once again it only took about 10 mintues to enter the financial details in MayRetire. I did have to make some reasonable assumptions on CPP and OAS and the amount that might be in LIFs vs RRSPs. I also ran the plan to age 95. Of course that’s making a longevity assumption, and we should always consider longevity when we develop the plan. Err on the side of increased longevity, of course.
I then spent a few hours testing CPP and OAS start dates and the rate that they would ‘melt down’ their RRSP/RRIF accounts. I was also looking to create a smoothed (relatively consistent) tax rate over time. I paid attention to the estate planning essentials.
I found that Mandy and Syed could likely spend at a core rate of $110,000 per year after tax. I also gave them an additional $30,000 in go-go years spending that lasted for 10 years. They are spending $140,000 after tax in the first 10 years of retirement.
Once the full OAS and CPP amounts kick in, we see the RRIF accounts settle into a steady and modest level. We can see that a cash flow plan is a bit of a dance between income sources. The retirement calculator becomes the choreographer.
Here’s the account balances over time. The more tax inefficient RRSP/RRIF and Taxable accounts are spent down first as we feed the most tax efficient TFSA accounts.
The plan offered a smoothed combined tax rate just above 16% for most of the plan. There is no OAS clawback. Potential estate taxes are reduced to near zero at age 90. The plan has a high success rate, running through the many stress tests on MayRetire.
Zoom presentations on this plan and more
This week at Retirement Club, we’ll go over this plan in more detail in one of our Zoom Presentations. We’ll also go over another demonstration plan created for a Retirement Clubber’s actual scenario. Most find they are likely able to spend much more than predicted or anticipated.
You can join Retirement Club and join us for these Zoom presentations. There is a modest annual fee to join the club. We know that you will find incredible value. Many self-directed investors find that with the right information and tools they can also self-direct their retirement.
If they want a second opinion they can consult an advice-only planner who is a retirement expert. Some retirement clubbers run their own plans and confirm with a planner. They can then move on to self-directing the plan over time.
This week we will also have a Zoom call that features a presentation on the Purpose Longevity Pension Fund. Fraser Stark from Purpose will lead the presentation.
We can think of it as a pension for those who do not have an employer pension.
The MayRetire retirement calculator
There is a very good free-use version for MayRetire. If you want to take advantage of the MayRetire Plus the cost before Sept 1 is $49, it will then move to $79 annual. Retirement Club members receive a 50% discount, you’ll pay $39 for the first year. After you sign up for Retirement Club I’ll fire off your email address to MayRetire so that you’ll receive that discount. MayRetire is an affilitate partner of Cut The Crap Investing.
Here’s a video on how to use MayRetire Basic.
The MayRetire home page breaks down the features of Basic vs Plus.
Having an affordable (or free) retirement calculator is a big plus, as you will need to run your plan every year or two. That could save you thousands each year.
Join Cut The Crap Investing
You can follow this blog, it’s free. Newsletters, plus other free content and ‘ideas’ will be delivered to your email inbox. Enter your email in the subscribe area, or ‘join us today’ on the home page.
ETF Portfolios / Stock Portfolios / Retirement Strategies / Wealth Creation / Retirement Club
Retirement Club
You can also join us at Retirement Club for Canadians. It’s most everything you need to DIY your retirement. The Retirement Club offering …
Earn a break on fees by way of of this Justwealth partnership link.
Here’s Canada’s top-performing Robo Advisor, Justwealth. You can get advice, planning and low-fee ETF portfolios all at one shop. Canadians can have it all. That’s a wonderful shop for retirees who want planning and low-fee portfolios. Of course, it’s a great option for those in the accumulation stage as well.
Consider Justwealth for RESP accounts. That is THE option in Canada with target date funds that adjust the risk level as the student approaches the College or University start date.
Thanks for reading and watching. Have a great Sunday and week.
Dale
This cash-flow plan is good for Canadians. For those of us still in the US have you an alternate plan?
Thanks
Hello. There are many free or good-value retirement cash flow tools available in the U.S. Try Google and AI, you’ll find lots of options 🙂
Dale