At retirement, it is natural to feel somewhat unsettled as you transition from 'getting a paycheque' to drawing down on your savings. Especially after the kind of fluctuations that people experienced in the value of their retirement savings during 2008 and 2009, they are looking for way and means to be and feel more secure in their income withdrawal strategies.
While investment outcomes are certainly an important part of achieving your income targets, the essence of retirement income planning is to get a dollar to spend in the most efficient way possible. In doing so, you can reduce the strain on your savings by minimizing the number of pretax dollars you have to withdraw to deliver the required after-tax (spendable) income. Here are some of the ways you can do just that.
Tip #1 – Preserve government benefits – Old Age Security and the Age Amount
OAS was once a truly universal, non-contributory income security payment which began at age 65. 'Universality' was withdrawn when the 'clawback' was introduced to the OAS program to essentially recover that payment from high income earners.
The OAS clawback may not affect most retirees, as it only starts to apply at Net Incomes of $70,954 (2013). But the Age Amount may be eroded even at modest levels of retirement income.
In addition to the federal personal exemption of $11,038 (2013), the Age Amount provides an additional 'tax-free zone' of $6,854(2013) to taxpayers age 65 and over. But once Net Income reaches $34,562 (2013), the Age Amount starts to be reduced.
We contend that if you are subject to a reduction in either of these benefits due to 'higher' net income levels in retirement, you are actually experiencing a form of double taxation. By employing income splitting strategies and controlling Net Income levels with tax-effective investment income, you can minimize the loss of these benefits and maintain their contribution to your income requirements.
Tip #2 - Split Income to minimize taxation
Preventing clawbacks is one way to maximize the benefits of government programs and tax credits, but you can also increase your household after-tax income by making sure that these advantages are 'doubled-up' when filing as a couple. Generally, this will involve income-splitting strategies to ensure that your household income enjoys two Personal Amounts, two Age Amounts and possibly, two Pension Credits, while also keeping the maximum amount of household income taxed in the lower brackets.
Tip #3 - Use registered and non-registered assets in unison
Our tax system is one in which graduated rates apply to each new range of income -- i.e. your first dollars of income are taxed at the lowest rate of tax but if your total income crosses over in the next 'band', the dollars falling into the next band will be taxed at a higher rate.
Some sources of income -- such as CPP, OAS, pensions, RRIF payments, RRSP withdrawals and interest income -- are 100% taxable. Your income plan should attempt to bring these sources into income at the lowest marginal tax rate. Other sources of income -- such as dividend capital gains income -- enjoy tax benefits which effectively lower the tax rate you pay on them. It makes sense to use these sources in the higher marginal tax rate bands to control the amount of overall tax you have to pay to generate the spendable, afer-tax income you need.
Tip #4 - Create a flexible income stream through the changing stages of retirement
It may not be necessary to have the same level of income (adjusted for inflation) throughout the post-retirement years. It is quite common to need more discretionary income in the early years of retirement when you may be actively pursuing lifestyle ambitions, but many retirees discover that in the later years, their income needs are significantly reduced. Does your income plan reflect this probability? By identifying and securing the amount of income required to cover the basic costs, you may free up assets to increase your early-years income. Making your retirement assets 'last' may just be a matter of evaluating how much you really need.
Tip #5 - Investigate insurance solutions to manage risk to your savings
Insurance can be a valuable tool in structuring your retirement income -- and not just to cover the obvious threats to your retirement savings, like health care costs. It can also be used very constructively to replace income or capital, to create and preserve inheritances or to ensure that you don't outlive your income streams. A well-planned insurance program can guarantee the outcomes of some aspects of your plan and in doing so, give you peace of mind to help you enjoy these years to their fullest.
These are just some of the basics of income planning which will help you stretch your savings. Rarely are any of these strategies in a synergistic manner to accomplish your personal objectives.