How Raj and Marie can net $80,000 annually—for life—from their nest egg

Q: I have a question regarding collecting my CPP at age 60. I will be 60 in a year and I don’t have any taxable income. I also don’t plan to ever return to work. According to my CPP benefit information, I am eligible to collect $505.68 per month if I were to start at age 60. At age 65, $790.13. At age 70, $1,121.98.

I have $360,000 in an RRSP. My wife, Marie, has $100,000. I am planning to cash in 4% of my RRSP every year when my wife stops working. Right now, she is still working, and her annual income is about $105,000. She also claims me as a dependant and gets the tax credit. She is 55 years old and planning to work another five years, retiring with a full Defined Benefit pension from her employer of $6,480 per month, starting at the age of 60. What is the best situation for me?

A: Thank you for your question, Raj. Transitioning from employment income to retirement income is almost as varied as the number of retiring households. The process of drawing on your wealth is ideally matched with your desired lifestyle spending all the way to end of life.  If the answer comes out as having enough then you are confirmed to be financially independent.

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Taxable income, tax deductions, tax credits, capital gains/losses are woven into your complete retirement map. The challenge is to manage income in such a way that it reduces taxes in the long run while fulfilling your desired lifestyle. There are specific milestones that impact your retirement decisions including starting CPP, starting OAS, converting RRSP to RRIF, the timing of pension entitlements, tax credit at age 65, pension splitting, spousal deductions, and few others.

Upon projecting your personal income and assets as you stated, you have an average annual after-tax income capacity of approx $90,000 to age 95. This assumes no debt with your spouse receiving a DB pension income of $6,500 per month starting in 5 years. The median after-tax income for couples in Ontario is $79,430 according to the latest census at Statistics Canada, so you appear to be on your way to financial independence.

You have not mentioned your desired retirement lifestyle target, so I picked an $80,000 average annual after-tax lifestyle in the next 5 years to illustrate the choices ahead.

In the chart, below, a baseline of income sources is established to fulfill $80,000 of personal spending. The first row shows CPP at age 60 and the second row at age 65. Both using the spousal amount deduction at tax time.

Income Comparisons at Age 60-64
To support $80,000 lifestyle spending

Raj CPP Start Raj CPP Amount (age 60) Raj RSP Marie’s Employment Marie’s RSP Marie’s MTR Spousal Amount Deduction Saves   After Tax Average Annual Income
Age 60 $6,076 $0 $105,000 +$4,800 43% $2,300   Baseline
Age 65 $0 $0 $105,000 -$1,100 43% $5,000   -$700
  • + is a contribution
  • Spouse RSP contribution is limited by pension adjustment
  • MTR = Marginal Tax Rate

If Raj starts CPP at age 60 with no other income, his wife Marie would qualify for a partial spousal amount credit and there would be enough couple cash flow to contribute $4,800 to her RSP. If Raj delays CPP to age 65, his wife Marie would qualify for the entire spousal amount credit of $11,635 (provincial tax credits vary and would slightly alter the calculations) which saves $5,000 on her tax bill but she would need to withdraw $1,100 from her RSP to supplement their income. Starting CPP at age 60 looks better.

The opposite way to utilize tax credits is to maximize Raj’s federal personal income exemption of $11,809 and his Ontario income exemption of $10,354. Raj can draw from his CPP or RSP or both. The best strategy is to draw at least $12,000 from Raj’s RSP each year until age 65 so that his CPP entitlement is unreduced by the early start penalty. His CPP entitlement would be about $700 per month if Raj is no longer employed from now until starting CPP at age 65. This strategy yields a better outcome shown in the first row below. There’s enough cash flow to contribute to the spouse’s RSP and Raj’s TFSA.

Income Comparisons at Age 60 – 64
Wait on CPP and start drawing on RSPs

CPP Start Raj CPP Amount (age 60) Raj RSP Marie’s Employment Marie’s RSP TFSA Contribution   After Tax Average Annual Cash Flow
Raj Age 65 $0 -$12,000 $105,000 +$3,300 $3,000   $300
Raj Age 65 $0 -$32,000 $105,000 +$3,300 $19,400   $500
Both wait to age 65 $0 -$32,000 $105,000 +$3,300 $19,400   $1,700
  • + is a contribution
  • Spouse RSP contribution is limited by pension adjustment

Use RSP withdrawals to bridge income in early years before age 65 so that you can patiently wait to start CPP at age 65. In the years before age 65, shift taxable income from the lower taxable spouse through RSP withdrawals to the higher taxable spouse through RSP contributions.

Once you reach age 65, you no longer have to do this RSP shuffle.  The tax strategy changes to income splitting.

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