Factors affecting the optimal drawdown of retirement income
SECTION 01
Analyze the client’s retirement situation by assessing the following factors.
1. After-tax income
01Determine the couple’s annual after-tax income requirement.
Assess the level of fixed employer and government pensions (before tax)
Assess the level of the before-tax income requirement (if greater than $80,000, more complex)
2. Tax brackets
02Determine each spouse’s current and future tax bracket based on fixed pension income (DBPP, CPP, OAS, RRIF, and LIF/LRIF minimum withdrawals).
3. Registered and non-registered investment assets
03Determine the total dollar value of each spouse’s registered assets (including commuted value of DBPP) and non-registered investment assets.
Determine the couple’s income/asset ratio (excluding fixed pension income)
Calculate the dollar value of each spouse’s registered assets relative to non-registered assets
Project future RRIF and LIF/LRIF minimum withdrawals to assess the future tax bracket
Identify additional assets that can provide retirement income (sale of cottage, universal life policy, business assets)
4. Strategic asset allocation and portfolio tax efficiency
04Assess the strategic asset allocation of the couple’s joint, integrated investment portfolio and ensure the tax efficiency of non-registered investment assets.
5. Estate planning goals
05Determine the couple’s estate planning goals.
Assess the sufficiency of retirement assets for the surviving spouse
Determine if there is a requirement for a fixed estate (specific amounts for bequests)
Cash flow management and tax planning
SECTION 02
Develop an optimized cash flow projection and detailed investment plan. The optimal drawdown of retirement income options is an iterative process and includes tax deferral and income-splitting strategies.
Annual cash flow projections
06Assess the timing and amount of current and future monthly, quarterly, and annual cash inflows and outflows (in nominal dollars).
Project cash flow for 1 year (detailed)
Project cash flow for 5 to 10 years (including the first few RRIF and/or LIF/LRIF drawdowns)
Pro-forma tax returns
07Assess annual after-tax retirement income for the 5- to 10-year period above.
Determine each spouse’s average tax rate (ATR), the couple’s ATR, and potential changes in the ATR
Determine each spouse’s marginal tax rate (MTR) and potential changes to the MTR
Assess tax strategies to maximize after-tax income and minimize the risk of outliving assets
Tax deferral strategies
SECTION 03
Timing of pension income
08Determine the optimal timing to receive an employer pension and CPP, including deferral options if there is significant pension income.
Tax bracket for each spouse
09Assess the optimal drawdown of registered and non-registered assets based on each spouse’s current and future tax bracket.
Determine the present value of after-tax income and future taxes over the entire retirement period
Sequence for optimal drawdown of assets
10Analyze whether the following “conventional” sequence provides the optimal drawdown strategy.
Higher-income spouse’s non-registered assets
Lower-income spouse’s non-registered assets
Lower-income spouse’s registered assets
Higher-income spouse’s registered assets
Tax-efficient investment portfolio
11Develop a strategic asset allocation for the couple’s joint, integrated portfolio, focused on the tax efficiency of non-registered assets.
Growth: hold non-registered equities and equity funds for long-term growth and tax deferral
Income: set up a systematic withdrawal plan (SWP) on equity funds and/or invest in preferred shares or dividend funds if income is required from non-registered assets
At death of the first spouse
12Implement tax deferral strategies at the death of the first spouse.
Use the deceased spouse’s unused RRSP contribution room (spousal contribution)
Offset the deceased spouse’s capital losses against any capital gains
Roll over the deceased spouse’s assets to the surviving spouse at the adjusted cost base (ACB)
Income-splitting strategies
SECTION 04
CPP retirement benefit
13Split CPP benefits, especially if the spouses are in different tax brackets.
RRIF and LIF/LRIF setup
14Base the RRIF and LIF/LRIF (provincial rules may differ) on the younger spouse’s age, and assess the optimal drawdown strategy for maximum flexibility.
Lower-income spouse’s registered and non-registered assets
15Assess the following strategies to build up the lower-income spouse’s investment assets, considering all tax issues.
Draw down first on the higher-income spouse’s non-registered assets to meet expenses, and invest the lower-income spouse’s income to increase non-registered investment assets
Invest the lower-income spouse’s RRSP/RRIF and non-registered assets in aggressive equities to equalize retirement income and minimize taxes
Sell the lower-income spouse’s non-income producing assets to the higher-income spouse at fair market value
Principal residence
16Release equity from the principal residence by selling, downsizing, or through a reverse mortgage, to provide each spouse with non-registered investment assets.
