Retirement Planning
Retirement Planning asks you to build and dismantle a retirement income plan: government benefits, registered savings, withdrawal sequencing and the tax interactions between them.
The three pillars
- Government: CPP/QPP, OAS and GIS.
- Employer: defined benefit, defined contribution and group RRSPs.
- Personal: RRSP, TFSA, non-registered savings.
CPP and OAS mechanics
- CPP is contributory and earnings-based. Starting at 65 is the baseline; each month earlier cuts 0.6% (36% at 60) and each month later adds 0.7% (42% at 70).
- OAS is residence-based: 40 years in Canada after age 18 gives the full pension. The recovery tax (clawback) is 15% of net income above an annually indexed threshold, based on line 23400, fully repaid around $150,000.
- GIS is income-tested and extremely sensitive to income - a reason to draw TFSA rather than RRIF income early.
Decumulation
- RRSPs must mature by the end of the year the annuitant turns 71, converting to a RRIF or annuity, or the full amount becomes income.
- RRIF minimum percentages rise with age (about 5.28% at 71, 6.82% at 80, 20% at 94+).
- Income splitting, the $2,000 pension income credit and credit splitting on CPP are the main levers.
Worked example
CPP at 65 would be $1,000/month; at 60 it is $640/month.
Breakeven: 640t = 1,000(t − 60 months) → 640t = 1,000t − 60,000 → 360t = 60,000 → t = 166.7 months after age 60, or about age 74.
So a client in poor health with a short life expectancy should generally take CPP early; a healthy client with longevity in the family and other income to bridge the gap gains by delaying to 70.
Traps
- Assuming OAS depends on employment earnings - it does not.
- Forgetting the clawback when recommending large RRIF withdrawals or a big capital gain.
- Using the wrong age for RRIF minimums when a younger spouse is named.
- Treating TFSA withdrawals as income for GIS and OAS purposes.
- Ignoring that RRSP-to-RRIF conversion is mandatory at 71 and triggers tax on the whole balance if nothing is done.