senior couple on a bench
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As your clients approach retirement age, they must consider critical decisions that will affect both their quality of life and their financial health in the years ahead. Two of the more pressing questions are when to begin receiving CPP benefits and when to convert their RRSP into an income vehicle.

Those decisions involve more than financial considerations.

“I wouldn’t start the conversation with ‘Let’s maximize how much money you’re going to have.’ It’s going to be more like ‘When do you want to retire? What do you want to do? Do you want to go on a vacation?’” said Michael Espinoza, senior manager of national tax with Grant Thornton LLP in Toronto. “That helps you paint a better picture of what the person wants to accomplish in the next few years.”

Clients can begin receiving CPP benefits at any time between their 60th and 70th birthdays. RRSPs must be converted into a RRIF or an annuity no later than Dec. 31 of the year the person turns 71.

The timing of CPP benefits will directly affect the size of monthly benefits received. Assume, for simplicity, that a client is eligible to receive $1,000 a month at age 65. A 0.6% discount will be applied for each month (7.2% per year) before age 65 that CPP benefits began. So, if benefits begin at age 60, a 36% discount will be applied, reducing monthly benefits to only $640.

For clients who wait longer to begin receiving CPP, a 0.7% premium will apply for each month (8.4% per year) past their 65th birthday. At age 70, the premium will be 42% and what would have been a $1,000 monthly benefit increases to $1,420.

“I rarely support someone taking CPP early unless they have shortened life expectancy or they truly require the income to support their lifestyle,” said Erin Gendron, an investment advisor and certified financial planner with CrossPoint Financial, which operates under the iA Private Wealth Inc. umbrella, in Ottawa.

Yet “so few Canadians consider delaying CPP. It’s not something that a lot of people talk about,” Gendron said. For example, if a client is healthy and longevity runs in their family, waiting for the CPP premium can be beneficial, she said. The enhanced CPP benefits also will provide that client with guaranteed indexing to inflation.

Delaying receiving CPP can have a profound impact on women in particular. “On average, the female spouse will live 10 to 12 years longer than the husband,” Gendron said. “So, if it’s a couple that I’m giving advice to, I often urge female clients to wait before drawing CPP for that reason, and other factors as well.”

Another key concern is market risk. A client worried about the uncertainty of future financial markets and who wants their base level of guaranteed income to be as high as possible may lean toward delaying their CPP benefits, said Marlene Buxton, retirement income specialist and owner of Buxton Financial in Toronto.

Delaying CPP income works well when a client has ample retirement savings. According to a survey conducted by Environics Research Group Ltd. for Investment Planning Counsel Inc. in August, 79% of investors plan to use RRSPs to supplement their CPP income.

The decision to convert an RRSP to either a RRIF or an annuity requires a careful financial planning analysis, but in the current low interest-rate environment, annuities are receiving mixed reviews.

“Depending on which annuity you go for, you can guarantee a certain amount of money for the rest of your life,” Espinoza said. “Some people like having that stability.”

Even though a RRIF gives the planholder flexibility in the amounts that can be withdrawn and control over the way the money is invested, a RRIF doesn’t necessarily offer stability because it is subject to market movements. “You’re kind of handcuffed in those situations where the market drops,” Espinoza said, “whereas, [with] an annuity, you’re not handcuffed in the same way.”

Many clients elect to roll their RRSP into a RRIF because they can continue to hold the same investments and earn tax-deferred income or capital gains while those investments remain sheltered. And the option to hedge also is available.

“If a taxpayer is worried about market risk and prefers a guaranteed, steady level income that an annuity can provide, I think a combination of both RRIF and guaranteed level income — not necessarily an annuity — is better than just going one way versus the other,” Buxton said.

“CPP and [old age security (OAS)] also can provide a guaranteed, steady, inflation-adjusted level of income. Many people use these benefits to form the guaranteed portion of their income. Some may also have a company [DB] pension plan to fill this need,” Buxton added.

Your clients should be made aware of two key differences between rules governing RRSPs and those governing RRIFs. No new contributions can be made to a RRIF. And, beginning the year after the RRIF is established, minimum annual withdrawals based on the portfolio’s value are required (escalating from 5.28% at age 71). Those withdrawals are taxable as income.

The decision about when to convert an RRSP must be predicated on several factors. (Because the conversion must be completed by the last day of the year the client turns 71, RRSP-holders born in 1950, for example, will need to covert their RRSP into either a RRIF or an annuity by Dec. 31, 2021.)

For example, if a client is still working and earning income, or has other sources of investment income they can live on, and they presume a normal life expectancy, they may prefer to hold off converting their RRSP until age 71.

But for other clients, lifestyle or taxation reasons may compel them to consider converting at least part of an RRSP into a RRIF or annuity earlier than age 71. (If a client has several RRSP accounts and is younger than 71, they can convert each account to a RRIF or annuity at separate times.)

For example, if a client will be bumped into a higher tax bracket at age 71 by adding RRIF income from minimum withdrawals, converting an RRSP to a RRIF early and withdrawing funds in the years leading up to that date would reduce minimum withdrawals later on. Early withdrawals may also reduce future clawbacks of OAS benefits, Gendron said. However, withdrawing the funds early from the RRSP means the funds cannot continue to grow on a tax-deferred basis. Instead, Gendron suggested, the early withdrawals could be reinvested in a TFSA if the client still has contribution room.

Buxton noted if an RRSP-holder has a younger spouse in a much lower tax bracket, the spouse over 65 can convert their RRSP into a RRIF as early as age 65 and begin splitting up to 50% of the RRIF income received between the spouses.

In combination with that strategy, Buxton added, the older spouse might also consider deferring their own CPP benefits until age 70.