To best answer your question about registered retirement savings plan (RRSP) and registered retirement income fund (RRIF) withdrawal strategies, I have modelled your situation and created a few different solutions. This will allow you to see the dollar value of each solution. The solutions assume a retirement income of $75,000 a year indexed at 2% for life to age 91, investment returns of 5% and real estate growth of 3%.
Modelling withdrawal strategies for retirement
I prepared four different models, each one building on the other, and the results are shown in the table below. The purpose of modelling is to help you understand, learn and make good decisions. Here is a brief description of each model:
- Base plan: delay RRSP/RRIF withdrawals until age 72, only drawing the minimum and using TFSA to fill in any gaps between now and age 91.
- Strategy 1: Mary draws $35,000 indexed to inflation from her RRIF, starting now, and your husband starts drawing $10,000/year, indexed, starting at age 65.
- Strategy 2: If there is any surplus income in any year it is added to TFSAs.
- Strategy 3: RRIF bridging to 70 to delay your CPP and OAS to age 70.
| Model | Wealth advantage of base plan over strategic plan | Estate advantage of strategic plan over base plan |
|---|---|---|
| Strategy 1: RRIF early | $180,000 | $150,000 |
| Strategy 2: Add surplus to TFSA | $110,000 | $330,000 |
| Strategy 3: CPP & OAS @ age 70 | $65,000 | $420,000 |
The results in the table show that, if your goal is to build wealth, the best strategy is to delay RRIF withdrawals to age 72. If your goal is to leave a larger estate, you had better implement one or all of the strategies. What is your goal, wealth-building or estate preservation?
If you have no children, you may not be concerned about preserving your estate and the base plan could be the best approach. As a matter of fact, if you plan to leave everything to charity, the best approach for wealth-building and estate preservation is the base plan.
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How different retirement income strategies play out
Let’s dive into the results of each solution for an explanation of each.
Base plan
The base plan builds the greatest wealth because tax is deferred as long as possible. Money drawn from a RRSP/RRIF is 100% taxable, just like a paycheque, which results in less money invested to compound over time.
The estate value, by contrast, is lower than any of the other strategic models due to the tax. Taking only minimum RRIF withdrawals starting at age 72 leaves a RRIF account of about $830,000 at age 90 which will push the tax owing at death into the highest tax bracket.
Strategy 1
Drawing the RRIF early means paying a little more tax today but less tax on the estate. In some cases, it will help to keep you from entering the OAS clawback zone, which is not an issue for you Mary as there will be no clawback for you.
