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Advisors can help retired clients manage cash flow by determining their most tax-efficient withdrawals, factoring in personal circumstances and adjusting as needed through retirement.
“There will be trigger points, potentially, or it could be a slow evolution,” said Peter Bowen, vice-president of tax and retirement research for Fidelity Investments Canada in Toronto. Bowen spoke last week at the Institute of Advanced Financial Planners’ 2022 symposium in Gatineau, Que.
The level of cash flow will be based on the client’s needs and wishes, “tempered with the reality of how much they have available [via income sources],” Bowen said.
Retirees may be able to draw on a variety of income streams: government pensions; private pension plans; annuities; registered accounts; investment income from taxable accounts (interest, dividends or capital gains); rental income; proceeds from the sale of a home; inheritances; and even part-time employment income.
A well-drawn hierarchy of withdrawals will seek to “smooth out tax rates over time,” reducing the tax hit through retirement and, eventually, to the client’s estate.
For example, a single 65-year-old man with large RRSP/RRIF balances may decide to delay triggering Canada Pension Plan (CPP) and old-age security (OAS) in order to boost these amounts at age 70 and protect against longevity risk.
At the top of the client’s withdrawal hierarchy between the ages of 65 and 70 is making withdrawals from RRSPs and RRIFs beyond the required minimums. By drawing down on RRSPs and RRIFs between the ages of 65 and 70, the client will mitigate the tax hit, including potentially the OAS clawback, that he might otherwise have when he begins drawing CPP and OAS at 70.
Next in the hierarchy is tax-loss selling and liquidating non-appreciable investments in taxable accounts, followed by arranging a tax-efficient regime of withdrawals — such as investments that offer return of capital — to achieve tax deferral. Finally, capital gain harvesting and withdrawing from a TFSA round out the client’s hierarchy.
“Taking out [savings] from a TFSA should be pretty low [in the hierarchy] because, even for seniors, it’s a pretty powerful account,” Bowen said.
At 70, the client’s withdrawal hierarchy will change: he begins collecting CPP and OAS and withdraws no more than the minimum from a RRIF in order to manage income levels and OAS clawback.
Other client scenarios will generate different hierarchies. For example, for couples with uneven incomes, the higher-income spouse will look to boost pension income from certain sources so as to take advantage of income-splitting opportunities with a lower-income spouse.
“At the end of the day, you want to work with your client to help them to create a retirement vision — it’s their retirement vision — understand all the various retirement income sources and use those tax-efficient withdrawal strategies,” Bowen said.
Investment Executive was a media sponsor for the Institute of Advanced Financial Planners symposium.