Retirement is the pinnacle of most Canadians’ financial plans. But the financial industry’s emphasis on investing means there can be a tendency to overlook alternative strategies that can make retirees better off when they stop working. Here’s a look at some of them.
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Partial RRIF conversion
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If you have eligible pension income, you may qualify for the pension income amount. This is a tax credit that can reduce tax payable. One source of income that qualifies is defined benefit pension income. Fewer retirees have pensions these days, but most have registered retirement savings plans.
If you convert your RRSP to a registered retirement income fund by age 64, RRIF withdrawals starting at age 65 qualify for the pension income amount. If you have a large RRSP or another reason you are hesitant to convert your whole account, you can consider converting part of your account. RRSP to RRIF conversion is not all or nothing. You can convert $14,000 of your RRSP savings into a RRIF, for example.
What is the significance of $14,000? If you have a low or modest income, you can withdraw $2,000 per year tax-free or close to it due to the pension income amount tax savings between age 65 and 71 when you must convert your RRSP to a RRIF. That is seven years inclusive, times $2,000 of RRIF withdrawals, or $14,000 in total. Tax savings may be about $400 per year or $2,800 cumulatively by age 72, depending on your province or territory of residence. For two spouses, that could be more than $5,000. Especially for a retiree couple whose finances are tight, that $5,000 may be material.
CPP deferral
Every time I write about Canada Pension Plan deferral, I get accused of working for the government and conspiring to reduce people’s hard-earned pensions. For the record, I am a financial planner specializing in retirement who likes to help people maximize their retirement income.
You can start CPP at 60. You can wait until age 70. The longer you wait to start your pension, the higher your payments. But if you defer, you are playing catch up compared to what you could have received starting earlier. If you are in good health, and live into your late 80s or early 90s, as is expected for the average 60-something-year-old once making it to retirement, you are generally better off deferring CPP.
You would need to earn more than a six per cent annual return for life, net of investment fees, to be better off starting CPP earlier, if you are in average health with an average life expectancy. Risk tolerance and financial decision-making tend to deteriorate as we age, so for a healthy retiree with a long life expectancy, CPP deferral can make financial sense. It also simplifies retirement planning as we age.
Only five per cent of CPP applicants in 2022 were 70 years of age. Few people wait that long to apply. Personally, I think most retirees would be better off. I have worked with thousands of retirees and those with higher pension income tend to worry less as they age, especially when that income is indexed to inflation. I promise the government is not paying me to trick you into not taking your CPP later. In many cases, it can make sense.
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GIS
If you are a low-income retiree, CPP deferral has an added benefit. It may help you qualify for the Guaranteed Income Supplement if you apply for your Old Age Security (OAS) pension at age 65. GIS is a supplement paid to OAS recipients that is means-tested.
In order to qualify, a recipient’s income must be below about $21,000 if you are single, widowed, or divorced, but as high as about $51,000 if your spouse does not yet receive OAS.
Tax-free savings account (TFSA) contributions may be a better saving option for workers with modest incomes and tax brackets so their withdrawals in retirement are not taxable like RRSP withdrawals. This can help increase GIS and other government benefits.
Most mainstream financial advice is targeted at people with high incomes and lots of money to invest, so GIS maximization tends to be an overlooked discussion point.
Borrowing against your home
Debt in retirement has always been taboo but in some cases that advice may need to be reconsidered. If your goal is to never deplete your investments, and you live in an expensive home in an expensive city, you may end up leaving a significant inheritance to your kids, if you have them. If you do not, maybe leaving an inheritance is even less important to you.
I think it is OK to have a retirement plan that includes needing your home equity someday. This can be accomplished by downsizing, selling and renting, or moving to a retirement home. But if someone chose to borrow against their home using a secured line of credit or a reverse mortgage to buy a few more years of time before making such a move, I think it can be considered.
The broader financial industry may not like that concept, but they tend to get paid to manage investments, so spending it all is bad for business. Some retirees are more comfortable living off their investment income and never drawing down their capital, and that is their choice. But they may be working too long, spending too little in retirement, or missing the opportunity to help their kids out financially earlier in their lives by ignoring home equity.
Moving abroad
Given the high cost of living in Canada, there are people approaching retirement or already retired who could stretch their dollars further in another country. There are plenty of programs that allow expat retirees to move to locations around the world and qualify for visa programs or residency. Places like Portugal, Mexico and Panama.
Retiring outside of Canada is not for everyone. Many people want to be close to their families or friends and could not imagine living somewhere else.
Particularly for people pursuing financial independence so they can retire early, expatriation can help accelerate their goal. Many countries, like Costa Rica, Ecuador and Thailand offer digital nomad visas for those who can work remotely.
Semi-retirement
In the pursuit of financial independence, many people spend their final years of work going full speed ahead to reach the finish line. I often meet people in their 40s or 50s who can nearly afford to retire and could transition to part-time employment or a more fulfilling or less stressful role, and instead coast into retirement.
Semi-retirement can help bridge the transition to full retirement by allowing a staggered reduction in work rather than an immediate one. It can help make the lifestyle changes less extreme. It can allow time to develop hobbies and prepare for full retirement.
Many people who are in a position to do this are good savers and the thought of saving less or not saving at all and drawing down assets can be scary. But as we age, we have less time and fewer healthy years to do the things we want with the people we want to do them with, whether it is aging parents, teens turning into adults, or our spouse.
Summary
Mainstream retirement planning focuses too much on maxing out RRSPs, earning high investment returns, and living off of dividends. The focus on investing by the financial industry tends to overlook unconventional retirement planning strategies that can accelerate or maximize retirement. Whether you work with a planner or not, it’s worth taking the time to educate yourself about these alternative strategies if you want the best retirement possible.
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