Five strategies for a tax-efficient retirement

"It's about which assets to use first"

Deanne Gage 5 July, 2012 | 6:00PM
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You circled the date on the calendar years ago. Now that day is here and you finally have adequate funds to make it happen. Hello retirement!

Now the concept of retirement-income planning comes into play. Unlike retirement planning, which focuses on accumulating enough assets to retire in the first place, retirement-income planning is all about withdrawal strategies. While you often hear advisors emphasizing the importance of saving for retirement, there's little discussion about how to ensure your money lasts for the long haul once you're actually retired.

When you are working full-time, you likely receive income from one or two sources: your biweekly paycheque and money from non-registered investments. Once you're completely retired, you probably have five or more different sources of income -- everything from government entitlements, pension plan, TFSA, RRSP or RRIF, locked-in investments and so forth.

"Things now go beyond just how the money is invested," says Daryl Diamond, author of Your Retirement Income Blueprint and founder of Diamond Retirement Planning Ltd. "It's about which assets to use first and which to defer."

Retirement-income planning must take some variables into consideration that don't exist when you are simply accumulating assets. The first is longevity, or the risk of outliving your money. You know death is an eventuality in retirement, not a potential risk factor like in the accumulation years. But you just don't know the duration of your retirement and, therefore, how long the money has to last.

When accumulating money for retirement, you likely had a date of completion, say age 68. Even if you had to work a few more years to meet that goal, there was still an established end point, Diamond notes. But with income planning, "we don't know whether the money has to last three or 43 years. We don't know how long you are going to live."

Daryl Diamond

Inflation is another variable to consider when planning for retirement income, notes Alexandra Macqueen, Toronto-based co-author of Pensionize Your Nest Egg. "We may not think of inflation as a significant risk lately because inflation has been so low for so long, but it can still devastate over a 30-year retirement, even at a low rate," she says.

Finally, sequence of return is also a risk factor. Macqueen says this variable takes into account the significance of when you start withdrawing money from your retirement portfolio. Retire and withdraw from your investments in an booming market (i.e. circa 2006) and your investments will last longer than if you started drawing on an already depleting portfolio in late 2008 after markets had dropped 40%.

Now that you're receiving income from multiple sources, where do you draw the money from first so it's more tax efficient? Below are five strategies Diamond uses with his clients. He recommends consulting a financial professional who can review your specific situation.

1. Start with the inflexible income sources: With entitlements like Canada Pension Plan, Old Age Security, and if applicable, your own work pension or annuity, you have no control over the amount of income received. Diamond says these should form the base of your income.

2. Use the least tax-efficient income sources in lower tax brackets: While pensions and annuities would fit into this category, so would assets like non-registered investments, and payments from registered and locked-in investments. As your level of taxable income increases, you move into higher tax brackets, so Diamond believes it makes sense to use these sources of income first so they are taxed at lower rates.

3. Work efficiently with tax brackets: Diamond helps people unravel their fully taxable assets as they go through retirement. "If they, for example, have a big block of registered capital, rather than let that money continue to build, why don't we take out enough for the first federal tax bracket, pay the tax and then forward that amount into a more tax-efficient account, like a tax-free savings or non-registered account."

4. Look at income-splitting and asset-splitting opportunities: Splitting income with other family members will keep your net income lower and perhaps put you in a lower tax bracket, Diamond says.

5. Determine which assets are best to create income and which are best to defer: One tendency, for example, is to defer all registered assets (i.e. RRSP until the RRIF conversion at age 71) and use non-registered assets first. But Diamond finds the opposite strategy often benefits retirees more from a tax perspective.

Not sure if your advisor is deploying good retirement income-planning strategies? Diamond recommends asking, "What strategies are you going to employ when I transition from an accumulation plan to one where I need to start taking income from these assets?" Once you have the advisor's answer, go further and ask for a sample of a written retirement-income plan.

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About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and She can be reached at

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