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Executive Summary

When establishing the best strategy to access retirement funds, it is vital to determine a few important points:

  1. What is your estimated cost of living goal for the first year of retirement?

  2. What are other sources of income you expect beyond your investment portfolio, like Canada Pension Plan, Old Age Security, rental property income

  3. As of the first day of retirement, what is your retirement portfolio worth?

What you need to know

Transforming RRSPs to Income using a Registered Retirement Income Fund (RRIF)

A flexible means of converting an RRSP to income is to transfer the savings to a Registered Retirement Income Fund (RRIF). Unlike an RRSP that is designed to encourage retirement savings and asset accumulation, an RRIF is designed to provide an income from the funds you saved throughout your working years.

RRIFs are a flexible form of receiving payment. They allow you to make large withdrawals, change investment details and alter registered automated payments without accruing major fees and penalties.

Note: money paid out through an RRIF is subject to taxation at your marginal tax rate.

Life Annuities

Life annuities are a low maintenance approach to managing retirement income because once purchased you will receive a fixed lifetime payment regardless of the state of the economy, stock market or interest rates.

If opting for this approach it is very important to properly calculate the number of anticipated years of retirement divided by the amount of money you’ve saved. If not, you could outlive your savings.

Life Annuity and RRIF

Another option is to put your money into both an annuity and an RRIF. This is an especially smart move if you want the comfort of a guaranteed income as well as some control over your investments.

Outside of the Box: Delaying Cashing in Benefits

If you are fortunate enough to retire early, there are a few different options to consider. One handy strategy is to postpone claiming Canada Pension Plan (CPP) benefits. Although withdrawing money early from retirement savings can have severe tax penalties, benefits like CPP boast a nearly 8% increase for every unclaimed year after retiring. Therefore, postponing cashing in on such benefits is something worth considering.

Retirement Income Strategies

The Bucket System Plan

One strategy often used to develop a retirement income plan is known as the bucket system. This strategy focuses on meeting cash-flow needs while simultaneously generating additional funds using your retirement savings.

Generally speaking, the bucket strategy allots cash and other liquid assets to (metaphorical) bucket #1 which is to be used to fund your spending needs throughout the first five years of retirement.

Bucket #2 is designated to meeting the needs of your next decade of retirement. Because it is meant to be used in the future, bucket #2 is reserved for investments with greater volatility because you have time to ride out fluctuations in the market.

To finish, bucket #3 is made up of traditionally more risky assets as it is intended to meet expenses beyond years fifteen of retirement.

Systematic Withdrawal Plan

Another strategy for withdrawing retirement funds is the systematic withdrawal plan (SWP). This approach allows you to withdraw either fixed or variable funds from an already existing mutual fund portfolio at regular intervals. The SWP strategy is used to cover general living expenses throughout retirement and it offers more flexibility because, unlike annuities, your money can be withdrawn at no additional cost.

The difficulty in using the SWP approach is that staying disciplined and not overspending can be difficult.

Bottom Line

Talk to your Advisor to best understand the different strategies and options in order to deliver the very best retirement strategy you deserve.