How to build a retirement ‘paycheque’ to replace your work paycheque

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There is always a big focus at this time of year on putting the right amount of money into your registered retirement savings plan. Quite frankly, that can be the easy decision.

The tough part is actually building a retirement “paycheque” in the most tax-efficient way once your regular paycheque disappears.

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Over the years, we have received thousands of questions from clients related to a wide range of financial and planning issues. Without a doubt, the highest number of questions relate to managing the transition from a workplace paycheque to a different source of funding your lifestyle.

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The first thing to remember is that you may not need to replace the paycheque. You only need to create the cash flow to cover your expenses.

If you are lucky, your paycheque covered more than just your expenses. Now in retirement, some expenses have likely disappeared, too. One obvious example is your RRSP contribution and any pension deductions. You may also finally be at the point where your children are fully off the payroll. Depending on the job you were doing, there might be travel, clothing or other work-related expenses that have disappeared. Maybe life insurance and long-term disability insurance are no longer required.

Once you know what you need to live, then comes the task of building your retirement paycheque from your various assets. To complicate this, there may be benefits to drawing certain assets sooner and other assets later.

One of the biggest questions is whether to take your Canada Pension Plan (CPP) at age 60 or later — any time up to age 70. The benefit is that your pension payment will grow by 8.4 per cent for every year you delay between age 65 and 70. The risk is that you may not live long enough to truly benefit. From a pure math perspective, you will want to delay your CPP until age 70 if you think you will live longer than about 82.

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Most Canadians, however, don’t think about deferring their Old Age Security (OAS) from age 65 up to 70. This would add 7.2 per cent a year, but OAS also has an income threshold after which some or all your payment is clawed back. Still, for many Canadians it is worth considering delaying OAS as well as CPP.

If you have a defined-benefit pension, it will pay you every month and you have no control over that (other than potentially taking the pension early or waiting until 65). Other sources of income have greater flexibility. You can draw any amount down to zero from your RRSP until you are 72. Even in the year you turn 72, you must take a minimum withdrawal from your registered retirement income fund (RRIF) account, but you can choose to take more. These decisions can have a big impact on your lifetime tax bill.

One strategy we often recommend if the health of a client is good is to delay CPP and possibly OAS until age 70, and draw funds down from the RRSP/RRIF in the otherwise lower-income years between retirement and age 70. This will allow you to maximize your pension income, but also give you a lower minimum withdrawal amount from your RRIF when you must take funds out.

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Another big factor to consider is the issue of being house rich and cash poor. Many Canadian retirees, especially in Toronto and Vancouver, have amassed meaningful real estate equity, but don’t necessarily want to sell their home.

A reverse mortgage is an option, but a home equity line of credit (HELOC) is a better choice for many Canadians. Even in retirement, most banks will offer a HELOC that might be worth 25 per cent to 40 per cent of the value of your home.

Some people say they like a reverse mortgage because they don’t have to make any interest payments with cash (the interest payments reduce the equity in the home). Having said that, in many cases, you can use a HELOC to do the same thing. You simply draw money from the HELOC every month to pay the monthly interest expense.

The reason a HELOC can be very helpful is that this is after-tax money. If it can be used to lower the amount you need to draw from your RRIF each year to cover expenses, it can lower your overall tax bill, and maybe even allow you to receive all your OAS.

Other factors to think about include any money you may have in corporate accounts, and how to best draw those funds out as part of your retirement needs.

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Life insurance can be a little discussed option depending on the type of life insurance you have. In some cases, there might be cash surrender value in a policy that can be drawn out tax effectively. In other cases, you might be able to borrow against your policy (with the ultimate payout reduced). This may not apply to most people, but can be worth reviewing.

Family can also be another source of funds. Whether it is being helped by elderly parents or wealthy children, this occasionally plays a role. It may not be ideal, but it’s nice to have if you are in need.

With all the focus on retirement savings, we should remember the financial work and planning that needs to happen after work.

Ted Rechtshaffen, MBA, CFP, CIM, is president, portfolio manager and financial planner at TriDelta Private Wealth, a boutique wealth management firm focusing on investment counselling and high-net-worth financial planning, and recently put together the 2024 Canadian Retirement Income Guide. You can contact him through www.tridelta.ca.

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