Learn innovative retirement planning tips and strategies from an expert: Adam Bornn, CFP, Partner, Parallel Wealth Financial Group. A complete transcript can be found below the video for those who prefer to read.
Retirement Planning Tips Canada – Transcript
“Hi, my name’s Adam Bornn from Parallel Wealth.
Today I want to talk about retirement planning and a lot of you focus on building up for retirement, but when it comes time to retire, there are a lot of important decisions you need to make. When to take your CPP? When to take your old age security? How to draw down your registered accounts?
There’s a lot that goes on between your income stream and your tax stream. So today I want to talk a little bit about things you need to think about as you head into retirement and a couple retirement planning tips that you should probably implement within your retirement plan to make it more efficient as far as giving you more after-tax income and paying less tax to CRA.
I want to share the planning software that we use here, and this is called Snap Projections. Now, if your financial planner isn’t putting a plan like this together for you, loop back with him or her and have them do this. This is part of the service that you should be paying for with your financial planner.
So what we have here is a husband and wife, they turn 65 in 2022, and they’re looking to retire. They need to transition from saving up to join an income stream. And so you’ll see here if we plug in their information, so we have some CPP, some old eight security coming in, and they each have $300,000 of RSP and 100,000 of tax-free savings that they’ve saved up and built up over time.
If we take this client, put in their information, their assets, their CPP, and map them out all the way until age 90, so assuming they’re going to live till age 90, you can see on the left-hand side here a real dollar income.
We put a 2% inflation rate in this plan of $68,694. So that is their after-tax income on an annual basis from today, age 65 retirement all the way down to age 90. The nominal dollar beside it is just the actual dollar amount they were going to have in their pocket to spend every single year. So 6$8,694. Again, this has him starting CPP right away at 65, old age security at 65 as well, and starting to draw down on the registered accounts.
If I go into Mr. YouTube here, you’ll see his CPP amount, his old aid security amount, and then again he’s taking about just shy of $12,000 out of his RRSP or RRIF at that point and about $9,000 from his TFSA. And he’s paying average tax rate or effective tax rate of just shy of 6%, so it doesn’t look too bad. And again, a nice little income in retirement of $68,700 after tax.
Now while that plan looks really good, provides a good income, and that’s typically the type of plan you’re going to get from an advisor if you get a plan at all. But what you want to look at is, okay, well what happens if I delay my CPP or delay my old age security or draw up my accounts a little bit differently? What is the total tax bill? And so again, on that plan there that you guys were looking at, the total tax bill was $227,000.
So that’s the total amount of tax they’re going to pay from age 65 until age 90. When you build out a financial plan, ask like how much tax am I paying? What is my after-tax income? What does my estate look like? Again within this plan, if I click on that total tax bill, that’s where you see that $227,000 of total tax, that’s combined.
One of the issues I have with your stock plan, which is what we’re looking at here, is if we scroll down to age 86, which is near the bottom here, you’ll see we have a bunch of RRSPs or RRIFs left at that point, close to $300,000, which create a tax bill, right?
If both Mr. And Mrs. YouTube passed away, there’d be a tax bill of about $111,000, which obviously we want to try to avoid. And the better we can avoid that tax bill and kind of that money into your pocket versus series later, obviously that’s much better. So how do we do that?
So when billing out a clear and concise financial plan for our clients, we look at a couple things. Deferring CPP is one of the biggest things. And at the end of the day, we’ve put hundreds of these plans together, and I can tell you that for 99% of Canadians, you should be delaying your CPP, your Canadian pension plan, all the way to age 70 or as close to 70 as possible.
Typically, we would only recommend taking your CPP prior to age 70 or closer to 65 for that matter, is if you had a health issue or you just needed the income, like there was no other income sources to draw from and you had to draw on your CPP just to put food on the table and pay the bills.
So, let’s take a look at the same plan here, but what we’ve done is we’ve bumped a CPP until age 70, and you’ll see that in the CPP column here. Now we’ve left old age security at 65. There’s more of a benefit to delay your CPP than your old age security. I won’t go into that in this video. We’ll cover that on a future one, but if we defer that CPP until 70, that’s going to help us out.
Now the other thing I’ve done that I’ve kind of stepped into here as well is we’ve done what we call the RRSP meltdown, and that is drawing down your registered accounts as quickly but as taxed efficiently as possible. And you’ll see here in the RRSP, so we’ve converted to a RIF and we’re drawing out about $30,000 a year until CPP starts at 70. Then we’ve scaled it back to $20,000.
What’s nice is that registered account is gone by 83, 84, so life expectancy 86, 87, that registered account is gone by the time you pass away. Now you still have that TFSA account that you can use, draw money out tax free. It’s much more efficient type of plan.
One of the other pieces of the plan when you build it like this, is not only by 83, 84, there’s no estate tax because you’ve drawn out all your RIF account or registered accounts at that point, but your only income is coming in from CPP and OAS and your tax free savings account, which is non-taxable.
Later in life. If you have to go to a care facility or you need in-home care, most institutions will build you off of your income. Now again, you could have the same income, but because it’s coming from the tax free savings account, it’s not taxable income.
So that’s one of the big benefits that we see with our elder clients in that you have the same income, but a lot of it’s not taxable, which allows you to pay a little bit less tax for rather your care facility or in-home care.
So by delaying that CPP from 65 to 70 and by drawing down your RIF account, your registered accounts, in a more tax efficient manner, and again, if you have RSPs and LIRAs and other accounts, it’s the same process. You want to draw those out in an efficient manner by life expectancy, kind of your mid 80s.
And if we do that in this plan, you can see that real dollar after tax income jumps closer to $70,000. It’s almost $1,000 more after-tax adjusted for inflation every year from age 65 to 90. So quite substantial.
Not only that, but if we look at your tax bill, we’ve reduced it from $227,000 down to $191,000. And lastly, if we look at age 86, scroll over estate tax is going to be $0. So again, it’s a much more efficient type of plan to create if you’re looking to create more income, more after-tax income, less taxes, and a better estate plan.
Typically defer your CPP using that time where you’re not collecting your CPP but need an income to start drawing down on your registered accounts.
What I want to close with today is what we call the laddered income. And this is kind of the last step of the process. We’ve created the tax and income strategy and created the most efficient plan that we can create. But now I want to create an income stream that better matches your lifestyle in retirement.
There’s a lot of research done around this, but from data retirement till about 71 to 73 years old, that’s kind of your, we call a go-go phase of retirement.
So there’s three phases of retirement. Your go-go phase until we typically map it until 75. Then from 76 to 85, it’s your slow-go stage. You might do a bit of travel, you’re still spending a bit of money, but you scale back. And then from 86 onward, it’s your no-go stage. You’re not spending much, you’re not doing much. It’s a much lower expense time of life for you moving forward.
So, I want to create more of a laddered income strategy. So if I take that same scenario that we just looked at and ladder it out, here’s what it looks like.
So again, instead of $69,600 per year, we’ve laddered it out at $75,000. So giving you more early, you can travel more, you can spend more money, Let’s allow you to do that. So $75,000 all the way down to age 75. Then we’ve scaled it back to $65,000 from 76 to 85, and then down to just shy of $61,000 later in life.
So still lots of money later in life, enough to pay the bills. And again, for those of you that have real estate, typically you wouldn’t sell real estate in the plan, you might downsize if you want to downsize, but if you have to go to a care facility or need in-home care, there’s always that asset in the background to lean on.
Plus you still have $5,000 after tax of income from 85 onward. I don’t know any clients of mine that are spending that amount of money at that point in their life, it’s typically 1,500 to $2,500 a month. So there’s lots of free cash flow there to help for a care facility or in-home care for those of you that are worried about that.
So hopefully that gives you a bit of a glimpse on what you should be looking for when your financial retirement plan is built out. Again, you want to look at when is the best time for you to take your CPP and hold date security and again, have your advisor run that for you and show you the differences of taking it now, whatever that means for you, 65, 70, somewhere in between, same with your old date security, look at the tax situation, your estate tax situation.
All these things come into play. Again, you want to create the most efficient tax and income strategy for you, and then look to create that laddered income. Again, you want more money early in retirement, but with the peace of mind that you’re going to have enough later in life.
I know doing this for the last 17 years that most people when they hit retirement, they’re not spending enough money early in retirement. What creating that laddered strategy does is it gives you that peace of mind of look, I can go spend that $75,000 knowing that I still have 60 later on in life.
So thanks again for joining me again in this video. Hope you enjoyed it. Hopefully you learned something through these retirement planning tips and we’ll do this again soon. Thank you.”
You can get more great insights and tips from Adam on his own YouTube channel.
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