If you are about to retire, you have some big financial decisions ahead of you! Here are a few important things to consider.
We all remember how stressed we felt starting our first job. Well, that’s nothing compared to the stress of leaving your last job! After all, unless you have a defined benefit pension plan, retiring means living mainly off of your own savings.
In this issue, we offer you an overview of decisions to consider at three key moments around retirement. In all three cases, one main principle should be kept in mind: how will your decisions affect your net income now and for the rest of your life?
1. Before you retire
Countdown: three years
You should start planning now for the critical phase of transitioning to retirement, which at this point becomes a short-term project. Your goal at this stage should be to work out how much income you might have during your retirement years. We recommend that you consult a Services d’investissement FÉRIQUE financial planner to take stock of your situation. Our article about withdrawal strategies might also provide some food for thought.
Countdown: one year
Many people make a gradual transition, opting at first for semi-retirement, which may last from one to several years. If this is your situation and your earned income is going to decrease, you might find it worthwhile to put your savings in a TFSA from now on, since RRSP contributions won’t save you as much on your taxes as in the past. On the other hand, if you continue to work full time, you will probably be earning the highest income of your working life: giving precedence to an RRSP will maximize your tax refund.
2. The year you retire
The first year of retirement differs a great deal from person to person. In particular, this is because earned income can vary greatly depending on the month retirement begins. If you stop working in the first quarter of the year, your income for this first year will be lower than if you stopped working in the fourth quarter.
In the former case, it might be preferable to invest in a TFSA from now on. If you retire in the fall, however, you should try to estimate your taxable income for the whole year before choosing between a TFSA and an RRSP. Keep in mind that your RRSP contribution room is based on your previous year’s income, while your tax deduction is calculated according to your income for the current year.
This year, you will start to receive income from different sources, such as your RRSP and the public and private pension plans. Important fact to know: the tax withheld on the income from these different sources is not harmonized and thus does not take your total income into account. It only takes into account the individual income generated by each source. As a result, it is up to you to do the consolidated calculations to manage both your earned income and your at-source deductions. These calculations will allow you to see if saving is still a good idea. If so, a TFSA would often be the most logical option, although in some cases an RRSP would remain the best choice due to the associated income tax deduction.
Another concept that will soon be familiar to you: the Old Age Security (OAS) clawback threshold. What you need to know is that the more your annual income is in excess of the $81,761 threshold, the more you will have to pay back a large part, or even all, of the OAS benefits you received. And this brings us to another key concept for retirees: retirement income splitting. If you have a spouse whose earned income is lower than yours at retirement, you may allocate a portion of your income to your spouse, thereby reducing your own taxable income. In some cases, this provision can save a household hundreds, or even thousands of dollars per year.
For more information about the clawback threshold and income splitting, see our article on this topic or visit the Canada Revenue Agency website. Also of interest: a few tips to help you choose the best time to apply for your OAS benefits (note, however, that the amounts have increased slightly since this article was published; you will find the current amounts on the Service Canada website.
Retirement is the start of a whole new life project that includes its own share of complications... especially when it comes to financial matters. To get a clearer view, and if you're still not sure whether to choose an RRSP or a TFSA for this period, contact our Advisory Services team. Their skills could save you a lot of headaches.
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