Design Thinking: Post-Retirement Income
Congratulations! You made it to retirement, and are living off of a combination of personal savings, company pension, and government benefits …and here’s where most of the retirement income planning resources stop, as if retirement is a finish line instead of a milestone!
Never fear, your neighbourhood design-thinking financial planners are here to pick up where many of the personal finance books left off (with the exception of a notable few, like Fred Vettese’s Retirement Income for Life). Over the past year, we’ve used Design Thinking to prompt you-centred planning around tough topics like cash flow, taxes, investing, disability as a business owner, estate planning, emergency preparedness, business building, and charitable giving.
We’ve helped you intentionally identify what will make you happy and fulfilled once you stop working, and spent time working through how to prepare your finances for this you-centred retirement. Today, we’re sharing a repeatable annual process for redesigning your retirement income as life, income tax, and investment returns unfold around you.
Why is this annual process important? Because markets cycle, tax policies change, and your retirement income plan needs to adapt! You may have thirty or forty years of happy, active life ahead, and we want you to spend as little of it as possible worrying about your income, your portfolio, or your taxes. Just like with your furnace, your car, and your cat, a bit of time and money spent on regular maintenance keeps you warm, moving, and…well, whatever it is healthy cats do all day.
As always, step one is to empathize, or collect information about the world around you and your place in it. Start your retirement income plan for the year by asking some questions about what actually happened last year and what you think might happen in this one. Your professional advisory team (which includes your accountant, your portfolio manager, and your financial planner) should be able to help you with this:
Year behind questions:
- How much did you spend last year? Did you have any new expenses that started or old expenses that stopped?
- How much did your investments earn last year across your total portfolio?
- If you have non-registered investments, what was the split between interest, dividends, realized and unrealized capital gains and losses, and/or return of capital?
- Did any sources of income start or stop last year?
- Were you surprised by last year’s tax bill?
- Did you have any difficulty with your health? Did you find managing your finances more challenging than it used to be?
Year ahead questions:
- How much do you want to spend on regular lifestyle things in the upcoming year?
- Are there any big purchases or expenses coming up (repairs, vacations)?
- How much will you receive from sources like your pension, annuity, Canada Pension Plan, and Old Age Security benefits?
- How much do you have remaining in your retirement portfolio? How is it allocated?
- Do you expect to work at all in the upcoming year? How much are you likely to earn, and what does your employer deduct from your paycheque?
- Are there any important deadlines to watch out for coming up? For example: the age 70 deadline to apply for Canada Pension Plan and Old Age Security benefits, the age 71 deadline to convert your Registered Retirement Savings Plan to a Registered Retirement Income Fund, or the age 72 deadline to start withdrawals from your Registered Retirement Income Fund?
We’ve been writing about Design Thinking for a whole year, so by now you probably know the drill: step two is to take what you learned in step one and use it to define the problem you’re solving this year, which is very likely to be some version of this question:
How much money do I need to live comfortably, where should I take it from, are there any strategies I can use to avoid tax or spending surprises this year, and am I still on track to live longer than my income will last?
Although this level of detail every year may sound like overkill, it is essential in those first confusing years of retirement, as you acclimate to spending your nest egg instead of building it. Over time, as you get more comfortable and start to put that first sensitive decade of retirement behind you, you might be able to relax on this routine a bit. In the meantime, here is the general framework:
- Calculate the difference between what you’ll receive after tax from pensions, annuities, CPP, and/or OAS and how much you expect to spend on your regular lifestyle
- Estimate your tax bill for this year (you can use a free tool like TaxTips.ca if you don’t have a regular accountant).
- Check your RRSP and TFSA contribution room, as well as any carried forward RRSP contributions that you may not have deducted yet
- Calculate how much you’ll likely be required to withdraw from your RRIF (your RRIF balance as of December 31st is multiplied by an age-based rate prescribed by the government)
- If you have a spouse or common law partner, calculate how much of your qualified pension income you can split between you
- Check the minimum and maximum thresholds for income-tested benefits (like Old Age Security, the Guaranteed Income Supplement, the Allowance, and the Allowance for the Survivor)
- Calculate how much you will need to withdraw from your portfolio to pay your taxes and spend the amount you want
If you already have a retirement income plan in place, the ideate stage, otherwise known as the throw spaghetti at the wall without even checking to see if it sticks phase, might not be as necessary for you. Although you and your financial planner (and your accountant too, if you’ve got one) shouldn’t limit yourselves to a past plan, you might be able to avoid much of the ideation mess because you did most of the spaghetti throwing already.
Retirement income ideation, when done right, is where you might brainstorm strategies like:
- Taking advantage of an unusually high or low income year
- Crystallizing capital gains or losses
- Charitable donations
- Making changes to your regular spending
- Adjusting your asset allocation
Finally, you’ve made it to prototyping! This is where you draft your plan for the coming year, and you write it down to avoid Mr. Confusion, Mrs. Panic, and their terrible, ugly baby: Little Miss Horrible Decisions.
In your plan for the coming year, you want to make sure that your long-term plans are still being served while you take advantage of short-term tax optimization strategies. For example, you may withdraw more from your RRSP or RRIF than is strictly necessary in order to reduce the account balance before minimum withdrawals start increasing rapidly as you age.
If it doesn’t already, your retirement income plan should include a cash flow infrastructure that creates ultra-visible boundaries around your desired spending for the year. You need to give yourself permission to spend the amount you’ve determined is safe, while building in an early-warning system that tells you you’re spending more than you wanted to…before it becomes a problem.
This plan should have your tax payments built into it, either via voluntary withholding on your Canada Pension Plan and Old Age Security benefits, or quarterly installments for those of us who paid more than $3,000 in income tax last year.
The last – and arguably, most important – thing you need to do in this stage is to explain it to your partner, kids, POA, and/or executor, ideally in writing. Taking the time to articulate your thought process, expectations, and actual experience helps them if you are suddenly incapacitated, and helps them even more if your cognitive abilities start to decline and they want to know when to step in and offer help. You may even want to build a regular cognitive test into your annual conversations with these important people.
The testing phase in this case is really straightforward: live your life! In the first few years of repeating this process annually, you may want to check in at the six month mark (or even quarterly) to note anything that you want to pay attention to or incorporate in next year’s plan.
Annual retirement income maintenance is one of the best gifts you can give yourself as you move out of the savings life and into the spending life, whatever that may look like for you. If you don’t experience a thrill of nerdy joy in looking at this to-do list every year, and get overwhelmed at the thought of redesigning your retirement income every year, please reach out. We can’t think of anything we’d rather do.