About four-fifths of the families Alex Hadjisophocleous serves have at least one income earner who is or was a government employee.
Couples could have any mix of defined-benefit (DB) pension plans, defined-contribution (DC) pension plans, RRSPs, LIRAs or LIFs, the advisor at Forest Financial Planning in Ottawa said. And those who have worked in the private sector their entire career may have multiple RRSPs from former employer group programs.
When a client has retirement assets spread across multiple accounts, advisors recommend strategizing for cash flow flexibility, tax efficiency and RRSP consolidation. They often recommend annuities to clients with low risk tolerance and no pension.
Keep cash flow flexible
A client’s retirement cash flow should match their lifestyle and spending needs, Ayana Forward, founder of Retirement in View in Ottawa, said. to cover essential bills like utilities, cell phone and car insurance payments.
The more types of registered retirement accounts a client has, the more technical the cash flow strategy becomes, Forward added. Clients should consider withdrawing from the most restrictive accounts first.
When clients with a LIRA retire, they have 30 days to unlock up to half of that account. When the rest of the LIRA turns into a LIF, clients should consider withdrawing the maximum amount as it’s the least flexible account and use it as regular retirement income, Alex Jessop, an advisor at Meridian Credit Union in Barrie, Ont. said.
If they need more, they can withdraw from their RRIF or TFSA as necessary, he added. “It’s usually a very effective drawdown strategy for future income flexibility.”
As for DB plan members, pensioners generally prefer the stable, and in some cases, inflation-indexed income these plans provide rather than taking the commuted value, Hadjisophocleous said. One of the few situations where taking the commuted value might make sense is if the client expects a premature death, such as a terminal sickness.
Strategize for tax efficiency
After meeting a client’s spending needs, an advisor should look at the most tax-efficient way to draw down retirement savings. Some clients may want to minimize estate tax while others look to minimize their year-to-year tax bill, Jessop said. Ask your client what they want and weigh the pros and cons of each approach with them.
If a client can afford to start their RRIF at age 71, it’s a sign that they aren’t depending on it for all their expenses, Jessop said. They can withdraw from their RRIF that January and put it in a TFSA for tax-free growth instead of taking it out in December and having that 12 months of growth count towards income tax.
For couples with an age gap, the retiring spouse can base their RRIF minimum withdrawals off the younger partner’s age, even if they’re under 65, Jessop added. While the couple may decide to draw more than the annual minimum to reduce estate taxes, it gives them more flexibility to cut their tax bill in case there’s a large one-time capital gain, such as selling a cottage.
For some clients, retirement is a transition and they may work part time. They can convert part of their RRSP into a RRIF between the ages of 65 and 71 and have more control over contributions and minimum withdrawals, Forward said. The RRIF minimum withdrawals will be lower with a smaller account, and the client can still take advantage of their employer’s RRSP matching program.
Clients can income-split their RRIF withdrawals with their partner and they can each claim the $2,000 pension credit that’s available to RRIF withdrawals, but not RRSP withdrawals, Hadjisophocleous said. This can add up to $28,000 of tax-free withdrawals over the seven years.
Dealing with multiple RRSPs
When Hadjisophocleous speaks to clients with multiple RRSP accounts, he encourages them to consolidate those accounts.
“More accounts don’t always mean more diversification … it’s just more complexity,” Hadjisophocleous said. “You get to the retirement stage or even converting to RRIFs and it becomes a headache at that stage.”
Multiple accounts are harder to track. Clients risk overcontributing to RRSPs or not meeting RRIF withdrawal minimums, with both incurring hefty penalties, Hadjisophocleous added.
Clients should consider switching their accounts to their current employer’s group RRSP as group plans tend to get a fee discount. Individual RRSPs that used to be part of a former employer’s group plan would lose that discount, Forward said.
If their current employer doesn’t offer a group RRSP, clients may consider which provider offers better service, the simplest management options and the right investment products in addition to low fees, Forward added.
And that are right for their financial goals and risk tolerance, Jessop said. Funds that are transferred into another RRSP often either sit as cash or in the default investment option, which may not be right for them.
Consider an annuity
Clients can consider placing a portion of their retirement funds into an annuity. Those with a low risk tolerance and high life expectancy may find annuities attractive, Hadjisophocleous said. But clients who have higher risk tolerances are usually better off without one.
The biggest hurdles are giving up control and the psychological fear of losing out if they die before the annuity breaks even, Jessop said. Term-certain guarantees will alleviate that concern in some cases.
Forward reminds her clients that annuities, while guaranteed for life, have no estate value. And while a rider indexing payouts to inflation are available, they come at a higher cost.