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What should Mr. K do?

Areader, Mr. K., writes in with a question: I am 71 years old and by December 2010 must begin withdrawals from my RRSP. I receive annual income from a defined pension plan ($60K), CPP ($10k) and OAS ($6k). My wife receives annual income from her pension, CPP and OAS of $23K [soannual retirement income for the couple is approximately $100k].
Our house is paid off and we have normal utility payments that I pay monthly. I have one debt of $15K for a new car purchased with no interest for 5 years (monthly payments are $280).
My question is: how should I withdraw from my RRSPs? Should I take an annuity monthly or quarterly, and, if so, how much (I had a by-pass in 2001)? Is there some other way to withdraw my RRSPs? As my average life expectancy is another 8 years, should I take my $75,000 RRSP and divide it by 8 years ($75,000/ 8 = $9500) and then divide $9500 by 12 to take out monthly payments of $790 for 8 or so years? I want to travel to foreign countries as long as I can. Can you help? Mr. K.
I passed this question on to some financial advisors and planners (readers are also invited to leave suggestions for Mr. K. at the end of the post, if they wish). First up with a reply is Jim Yih, a financial planner with a great deal of experience.
Mr. Yih says:
Great questions! Although these are great questions, its really hard to address them in this context. The best answer is one that comes out of proper planning. In this case, the most appropriate answer comes from retirement income planning. Its about doing some retirement income projections that takes into account a whole myriad of issues. I use a jigsaw puzzle analogy in my workshops.
How to get money out of RRSPs?
First lets address taking money out of RRSPs. When you turn 71, you must close the RRSP. You can cash out the RRSPs but the problem with that option is the entire $75,000 gets taxed all at once on top of the other income putting you in the highest marginal tax rate. The other option is to buy a life annuity with the $75,000. This will pay you a fixed monthly income for the rest of your life. If you live longer than your statistical life expectancy, it would be a good deal. The third option is to move the money in the RRSP to a RRIF (registered retirement income fund). This is the most common option because it gives the most flexibility for investments and income design.
Unfortunately, I cant tell you which option is best because there is not enough information to go by. Annuities are safe, guaranteed and predictable just like your pension. Theres value in that with todays market volatility.
Setting the right income from RRSPs
Lets tackle the next question of how much to take out? With an annuity, you dont really have choice. You need to find and insurance broker that will shop the market and run some quotes for you. Annuities are based on gender, age, amounts and current interest rates. You can choose a single life annuity on your life or a joint life annuity based on you and your spouse. Once you know how much an annuity will pay you, you can use that figure for comparison.
With a RRIF, you can set your income to whatever you want as long as you meet the minimum RRIF requirements. The minimum RRIF actually starts the year after you open your RRIF account. Starting at 72, your minimum income would be 7.48%. At 73, its 7.59%.
Ive always preached there are two reasons to take money out of an RRSP. The first is to use for what it was intended for in the first place – to spend it and enjoy it, especially in retirement. The second reason is in the most tax efficient way possible.
I cant address the first reason and only hope that you have enjoyed your retirement with or without RRSP withdrawals.
In terms of tax efficiency, here are a few thoughts:
Firstly, your total income alone would put you in the OAS clawback zone (income greater than $66,733). I assume that with your spouse being in a much lower income, you take advantage of the pensions splitting rules and give your spouse enough income to not only prevent OAS clawback but also to equalize your marginal tax rates.
Because you both have pensions, the most income you can earn to avoid OAS clawback is a combined income of $133,466. At this point even income splitting cannot prevent one of you from going into the OAS clawback threshold. Based on the information you provided, your total combined income is approximately $100,000. That essentially means you do not want to take out more than the difference (about $33,500) out of RRSPs or RRIFs.
From a tax perspective, it appears that there is no tax advantage to your income from RRSPs/RRIfs. Your approach of basing income on life expectancy is certainly an option. I would ask the question Will you need more income after the 8 years in case you live beyond your statistical life expectancy?
Survivorship requirement
One important issue that needs to be taken into account is whether your spouse needs some of the RRSPs after you pass away. This will depend on the $60,000 pension and how much of it goes to your spouse at death.
Other resources and articles
Everything you need to know about RRIFs
My special report on RRIFS: Getting Money Out of Your RRSPs
Everything you need to know about life annuities
Dont die with too much money in your RRSPs or RRIFs
There are several other related articles on Jim Yih’s website.