Are you saving enough for retirement?

[FurnaceFace]

New, early retiree here. I think Weitz’s comments are valuable. All the research I’ve done and all the older retirees I’ve listened to pretty much say the same thing: get your bucket list items done as early as you can. If that means sacrificing for tomorrow, do it, as tomorrow may never come. Also, these retirees have mostly stated the amount you think you need is greater than what you actually need. Really is you spend less than you planned, especially as you get older. The rule of thumb is retirement is 3 phases: active-semi active-not at all or to use the terms: Go Go, Slow go, no go. The amount you need early in t=retirement is not the same as what you need while you aren’t able or interested in traveling more.

I feel this is where a good plan comes into place which does some some of “laddering” to your spending needs. You might need 100k as an active 50 something retiree if you travel a bunch, but when you’re in your mid 70s that amount will more than likely be high, and when you’re older and going nowhere, it’s definitely a lot more than needed.

[Paulie Walnuts]

Saving enough is always interesting. If you have large RSP start deregistering before it’s RRIFd if you are in a lower tax bracket.

[Slava]

Originally Posted by Paulie Walnuts

Saving enough is always interesting. If you have large RSP start deregistering before it’s RRIFd if you are in a lower tax bracket.

Questionable advice. This might be the case, but it also might be unnecessary or provide little benefit.

[Paulie Walnuts]

Originally Posted by Slava

Questionable advice. This might be the case, but it also might be unnecessary or provide little benefit.

Unless you want a massive tax bill for your estate when you die with a large registered investment.

[Slava]

Originally Posted by Paulie Walnuts

Unless you want a massive tax bill for your estate when you die with a large registered investment.

Right but it’s not that simple. You pay tax on this withdrawals that you’re taking early, so the disparity between the early withdrawals and deferred tax hit might not be as large as expected. And the. The other major consideration is that you pay that tax years earlier, which means that money could be compounding tax-sheltered for a number of years.

Without knowing the values we’re talking about, and how long you’ll live these are more difficult things to project with certainty. I would also say it depends on the amount you consider to be a large RRSP and how fast you want to draw it down, but those tax consequences are going to be significant.

[FurnaceFace]

In general you shouldn’t wait to take out your RSPs until the end of retirement, and you shouldn’t take them all out immediately at the beginning either. You should take them out logically and at a prescribed amount to limit your tax implications over your retirement years taking all your other sources into account. Again, the reason you have a plan.

[DoubleF]

Originally Posted by Paulie Walnuts

Saving enough is always interesting. If you have large RSP start deregistering before it’s RRIFd if you are in a lower tax bracket.

I'll say it's a half decent rule of thumb without knowing anything. But if you want to optimize it to the highest level, then IMO Slava is correct in that there isn't enough information to conclude and if there are other factors at play, those factors could cause this move for you to pay more taxes over the life of the taxpayer.

Some of the looming financial issues near the end of someone's life though... please don't leave those types of deemed disposition messes for others to clean up. Please consider simplifying and eliminate complex finances before your passing. Please also don't cheap out on a few thousand dollars of cost upfront that could help prevent thousands if not tens of thousands of dollars of headache and dozens of hours to sort out.

[bizaro86]

Originally Posted by Slava

Right but it’s not that simple. You pay tax on this withdrawals that you’re taking early, so the disparity between the early withdrawals and deferred tax hit might not be as large as expected. And the. The other major consideration is that you pay that tax years earlier, which means that money could be compounding tax-sheltered for a number of years.

Without knowing the values we’re talking about, and how long you’ll live these are more difficult things to project with certainty. I would also say it depends on the amount you consider to be a large RRSP and how fast you want to draw it down, but those tax consequences are going to be significant.

I know you know this, but the other potential advantage to de-registering RRSP funds is that while the compounding isn't tax deferred it is likely taxed at lower dividend/capital gains rates. Now, it obviously doesn't make sense to de-register large amounts all at once if that's going to push you up the tax brackets. But for someone retiring even a bit early who is not going to have CPP/OAS right away I think the math for taking larger RRSP withdrawals early in retirement is potentially compelling. I went through this exercise with my father recently, and the value of deferring CPP/OAS payments and taking 100% of their cash needs as RRSP withdrawals instead for the first few years was really significant. Obviously it depends on return/life span assumptions.

Tl;dr the decisions around de-accumulation are complicated - it probably makes sense to call Slava or someone like him and get professional help.

[DoubleF]

Originally Posted by bizaro86

I know you know this, but the other potential advantage to de-registering RRSP funds is that while the compounding isn't tax deferred it is likely taxed at lower dividend/capital gains rates. Now, it obviously doesn't make sense to de-register large amounts all at once if that's going to push you up the tax brackets. But for someone retiring even a bit early who is not going to have CPP/OAS right away I think the math for taking larger RRSP withdrawals early in retirement is potentially compelling. I went through this exercise with my father recently, and the value of deferring CPP/OAS payments and taking 100% of their cash needs as RRSP withdrawals instead for the first few years was really significant. Obviously it depends on return/life span assumptions.

Tl;dr the decisions around de-accumulation are complicated - it probably makes sense to call Slava or someone like him and get professional help.

Did you factor in the pension tax credit and pension splitting of a RRIF (if married and both technically in lower brackets?). If one spouse's pension is substantially higher than the other, doing that aim to bring the balances closer over time is another strategy to consider.

But as always, "it depends".

[Slava]

Originally Posted by bizaro86

I know you know this, but the other potential advantage to de-registering RRSP funds is that while the compounding isn't tax deferred it is likely taxed at lower dividend/capital gains rates. Now, it obviously doesn't make sense to de-register large amounts all at once if that's going to push you up the tax brackets. But for someone retiring even a bit early who is not going to have CPP/OAS right away I think the math for taking larger RRSP withdrawals early in retirement is potentially compelling. I went through this exercise with my father recently, and the value of deferring CPP/OAS payments and taking 100% of their cash needs as RRSP withdrawals instead for the first few years was really significant. Obviously it depends on return/life span assumptions.

Tl;dr the decisions around de-accumulation are complicated - it probably makes sense to call Slava or someone like him and get professional help.

yeah, the thing is, it depends...as Double F says!

[bizaro86]

Originally Posted by DoubleF

Did you factor in the pension tax credit and pension splitting of a RRIF (if married and both technically in lower brackets?). If one spouse's pension is substantially higher than the other, doing that aim to bring the balances closer over time is another strategy to consider.

But as always, "it depends".

Yes. By "RRSP withdrawals" I actually meant "distributions from an RRSP prior to the year he turned 65, and distributions from the RRIF it was converted to at the beginning of the year he turned 65 for the purposes of pension income splitting/tax credits".

I was trying to keep it a bit simple, but as you note it really isn't simple and there are a lot of moving parts. Definitely not a situation where "rules of thumb" are very helpful, you need an individualized plan. Even more so than for the accumulation phase, imo.

[Shazam]

You can RRIF any time. You also don't need to RRIF everything at once.

[bizaro86]

Originally Posted by Shazam

You can RRIF any time. You also don't need to RRIF everything at once.

Sure. But there's not a big advantage to doing it before the year you turn 65, imo, since you can't income split or get the pension credit until then. And converting early limits your flexibility because then you have to take minimum distributions.

[Brupal]

If you have a massive RRIF your required RRIF withdrawals could be six figures and push you into higher tax brackets and result in OAS clawbacks. If you elect to take manageable RRIF payments early, putting you in a middle tax bracket for a decade you smooth your overall taxes paid and avoid having a massive RRIF balance at death that then for sure gets taxed at 50%.

[chemgear]

Is there an amount in the your RRSP's that is considered "too big" tax wise? Generally always thought that hitting the maximum every year was a bare minimum savings wise but maybe you can go too far?

(Want to make sure that I allocate my $4 million+ here. )

[GGG]

Originally Posted by chemgear

Is there an amount in the your RRSP's that is considered "too big" tax wise? Generally always thought that hitting the maximum every year was a bare minimum savings wise but maybe you can go too far?

(Want to make sure that I allocate my $4 million+ here. )

Means tested benefits could be reduced as a result of too high of income. But (assuming a couple rather than single) if you will have a combined income of 180k per year in retirement you probably should have just retired earlier.

More generally if your income tax bracket is the higher today then it will be in retirement you are generally better off with money in RRSPs than TFSA or taxable.

But make your self a spreadsheet and run test cases. A lot of it is it depends.

[Wormius]

Wrong thread.

[Geraldsh]

When you hit 70(or 71?) you are forced to roll out a minimum of 7% of your rrsp to your riff. If that amount is enough to affect your taxes you may as well do something about it beforehand.

[WideReceiver]

Originally Posted by Geraldsh

When you hit 70(or 71?) you are forced to roll out a minimum of 7% of your rrsp to your riff. If that amount is enough to affect your taxes you may as well do something about it beforehand.

That’s not how it works. You RRIF everything in the year you turn 71 then must withdraw 5.4% the next year.

[DoubleF]

Originally Posted by bizaro86

Sure. But there's not a big advantage to doing it before the year you turn 65, imo, since you can't income split or get the pension credit until then. And converting early limits your flexibility because then you have to take minimum distributions.

Depends what you mean by not a big tax advantage? If you're taking out RRSPs anyways and have no other pensions, converting a portion of the RRSP to RRIF allows for a non-refundable pension income amount tax credit, which is $2,000 and at 15% is worth $300.

RRIF aren't mandatory until around 71, so someone starting at 65 is still potentially getting 6 years of an extra tax credit for something they're doing anyways.

Originally Posted by Geraldsh

When you hit 70(or 71?) you are forced to roll out a minimum of 7% of your rrsp to your riff. If that amount is enough to affect your taxes you may as well do something about it beforehand.

Sorta... I don't know the rule inside out but basically...

At age 71, you're not allowed an RRSP anymore. If you have an RRSP, it's converted to a RRIF. The RRIF was typically supposed to be fully withdrawn in 20 years (age 91) so fundamentally you needed to withdraw 5% base per year (loosely based on amount at age 70 divided by 20).

But I guess the rules also allows for situations where there's meteoric growth in a RRSP/RRIF, so technically it can go past age 91, but by that point, the minimum annual payout is 20% of the base when the RRIF started.

https://www.woodgundy.cibc.com/en/re...ithdrawal.html

There's something you can do if you have a younger spouse and you haven't used up all your RRSP room by age 71. At that point you cannot purchase RRSP for yourself because you are not allowed an RRSP account. However, you can still purchase spousal RRSP if your spouse is still allowed an RRSP account.

That's also why if one spouse's retirement income is going to be wildly bigger than the other spouse's retirement income, it's potentially a good strategy to consider more spousal contributions so that you have appropriately "income split" in your later years to maintain more household income in the lower tax brackets. Many people don't realize that although there basically is not much of a difference now, the point of spousal contributions and RRSP is typically for a tax difference decades later.

Originally Posted by chemgear

Is there an amount in the your RRSP's that is considered "too big" tax wise? Generally always thought that hitting the maximum every year was a bare minimum savings wise but maybe you can go too far?

(Want to make sure that I allocate my $4 million+ here. )

It depends, but over $3 million FMV probably doesn't make a lot of sense to have in an RRSP. Divided by 20 years, it's around $150K a year. If something happens prior to it being fully withdrawn, the RRSP may be immediately pulled into income immediately which means being taxed in the highest tax brackets.

It's not a bad problem to have, but basically it'd be a gigantic pregnant liability. You're better off doing a complex tax planning strategy to get more wealth to your beneficiaries vs losing more than necessary of your wealth to tax.