During more difficult market times, we often suggest the importance of reducing withdrawals to put less stress on investment portfolios. This can be especially challenging for retirees who do not have the comfort of employment income. Many are also faced with mandatory withdrawals from the Registered Retirement Income Fund (RRIF). We do know that markets are cyclical and expect them to resume their upward climb. This is why it’s important to leave funds within a portfolio where possible to allow values to recover. Here are some thoughts, noting that individual situations vary based on factors such as income sources, taxation rates, lifestyle considerations and more.
Evaluate your liquid inflows — Having an understanding of your liquid inflows is important. For certain retirees, the income received through government benefits and employer pensions may be sufficient to meet living expenses. However, some may need to apply for additional benefits, like the Canada Pension Plan, to supplement income. Other retirees may consider picking up part-time work to generate income, shorten a retirement time horizon and increase a retirement portfolio by allowing a longer period of compounding for existing funds or through additional contributions.
Revisit your spending — With high inflation, money doesn’t go as far as it used to, especially for essential goods like food and gas. A budget may identify opportunities to reduce non-essential expenses and potentially reduce the need for income. For retirees, while a general rule of thumb used in the investing industry has been a four percent withdrawal rate for retirement income, at the onset of retirement this may be high. Spending can change dramatically over a retirement life cycle and depends on many factors. Maintaining a budget can help to provide a clearer picture of income needed at any particular time.
Consider the sources of withdrawal and the impact on taxes — Withdrawing from investment accounts has the potential to trigger taxes. For retirees, in addition to required RRIF withdrawals, this may put you in a higher marginal tax bracket. If you do require funds, you may consider withdrawing from non-taxable sources, such as the TFSA. If you are turning to taxable assets, it may be beneficial to take advantage of tax-loss selling, as 50 percent of a capital loss can be used to offset taxable capital gains. Or, there may be benefit in selling assets with the highest cost basis first, then moving to assets where the cost basis is lower to reduce the potential tax hit. This isn’t always the best choice when considering lifetime tax optimization; if you expect to be in a higher marginal tax rate in future years, this may impact your decision.
For those who must make minimum withdrawals from the RRIF, here are a few additional ideas:
Make RRIF withdrawals at the end of the year — By taking withdrawals at the end of the year, it may allow greater time for asset values to potentially recover. This also allows for a longer period for potential growth within the plan.
Make an “in-kind” withdrawal — If you aren’t in need of funds, consider making an “in-kind” withdrawal. While the fair market value at the time of withdrawal will be considered income on a tax return, you will continue to own the security. If this is transferred to a TFSA, subject to available contribution room, future gains will not be subject to tax.
Split RRIF income with a spouse — RRIF income qualifies as eligible pension income for pension income splitting. If you have a lower income spouse and you’re 65 or older, you can split up to 50 percent of your RRIF income to reduce your combined tax bill.