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Investing for retirement isn't easy. But it can pale in comparison to dealing with investments once you have reached the magic date. Not only do retirees still have to manage their money, they must ensure they don't outlive it as well.

They have to draw income, too, often from multiple sources, each with its own tax and other financial implications. Take too much from one source at an ill-advised time and you could harm the longevity of your savings.

Among the primary considerations is taxation, says Robyn Thompson, president of Castlemark Wealth Management Inc. in Toronto.

"A portfolio should be structured to pay the least amount of tax as possible legally allowed under the Income Tax Act," says Ms. Thompson, who is a certified financial planner.

Developing a strategy can be challenging because most retirees draw income from multiple sources, such as the Canada Pension Plan (CPP), Old Age Security (OAS), registered retirement savings plan (RRSP) and sometimes a work pension. Moreover, many also have a tax-free savings account (TFSA), one or more locked-in retirement accounts (LIRAs) and non-registered savings in taxable accounts.

Each account may be subject to different levels of taxation, and, consequently, where you hold investments such as stocks, bonds and guaranteed investment certificates (GICs) becomes all the more important.

"It's an asset-location approach," says Marc Lamontagne, a fee-only CFP and founding partner of Ryan Lamontagne Inc. in Ottawa.

For example, withdrawals from registered accounts – including RRSPs, RRIFs (registered retirement income funds), LIRAs and LIFs (life income funds) – are fully taxable income. Like work pensions, income from RRIFs and LIFs can be split with a spouse to reduce taxation (once plan holders reach 65).

But whether income from registered savings is split or not, many investors hold interest-earning investments in these accounts because interest is fully taxable, so no advantage is gained or lost.

Other investments, however, offer more advantages when held outside a registered account.

Typically, that includes Canadian equities, because just 50 per cent of a capital gain realized on them is taxable. Effectively, the taxes owing on capital gains are half of those on earned and interest income.

In addition, qualifying dividend income from stocks and equity-based funds generates a tax credit that reduces taxes on dividends, by about a third for the highest income earners and entirely for those at lower tax brackets.

Another increasingly important consideration is how TFSAs fit into the picture.

"In general, we encourage people to think of drawing income from the TFSA as the last source of potential retirement income," says Doug Nelson, a money manager with Nelson Financial Consultants in Winnipeg and author of Master Your Retirement. "We see the TFSA as a safety net or buffer for both income or capital needs."

Because TFSA withdrawals are not subject to taxation, these accounts function as ideal slush funds for home renovations, major vacations and emergencies.

Given the TFSA's tax-free nature, many experts recommend holding interest-earning investments in them. "Anything that does not have preferential tax treatment should be held in the TFSA first," Ms. Thompson says.

Another school of thought suggests retirees hold growth investments in a TFSA, too, given interest rates are at historic lows and tax savings on interest within TFSAs may not be substantial now.

Equities can offer more tax efficiency because they have the potential to grow much more in value over a longer time, providing, for example, a significant tax-free asset for the estate.

Ms. Thompson says retirees are best off not holding U.S.-listed equities inside a TFSA, however, because dividends are not eligible for a credit for the withholding U.S. tax (as they are when held in a non-registered, taxable account).

Retirees wanting to invest in foreign equities in a TFSA can invest in TSX-listed ETFs or mutual funds that hold foreign securities, she adds. Another option is holding U.S. securities inside registered retirement accounts where a tax treaty exempts them from U.S. taxation.

Equally important for retirees is developing a plan to draw income. Mr. Nelson suggests a two-pronged approach.

"The first is to determine how much after-tax income you need to cover both your basic living expenses as well as your lifestyle expenses," he says. "This is the 'bottom up' approach."

The second – the "top down" approach – means figuring out the amount of income received from different sources of income: work pensions, CPP, OAS and investments.

The objective is to compare the two results, "to see to what extent they are in alignment."

If guaranteed income sources such as work pension, CPP and OAS are sufficient for basic living costs, the next step is determining how to draw income for lifestyle needs from savings. Many retirees are inclined to not draw from registered accounts like the RRSP early in retirement to avoid paying more taxes than necessary. Instead they look to other sources.

Yet it may be better to do the opposite: systematically withdraw from registered accounts to slowly grind them down with the goal of paying a lower tax rate over time instead of waiting until age 71, when mandatory withdrawals begin limiting the ability to control taxation on income.

"Delaying paying taxes as long as possible is generally a good thing, but you don't want to do it so you pay more taxes in the long run," Mr. Lamontagne says. Leaving registered money intact as long as possible can also lead to OAS payments being clawed back, he points out.

But taxation during retirement is not the only consideration. Many retirees need to be mindful of the tax bill once they're gone, because the value of registered money is reported as income on the final tax return if there is no surviving spouse.

And the tax man's cut could be almost half of its value.

"When you factor that into the equation, the order in which you're going to draw your money from investments often changes," Mr. Lamontagne says.

Yet the starting point should always be income needs, Mr. Nelson says. It dictates the investment strategy – not the other way around.

"This approach will then tell you more about the kind of investments you should own, the amount of risk you should take and where to draw from at each stage of retirement," he says. "Odds are if the income strategy is secure and tax efficient, you do not need to take much risk in the portfolio."

(Editor's note: An earlier version of this story incorrectly stated that four kinds of registered retirement accounts that can be split with a spouse. In fact, only RRIFs and LIFs can be split.)

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