Maximizing Your Income in Retirement
AGF had a very clever advertising campaigns entitled “What are you Doing after Work?” Regardless of whom you might be – Spiderman, Quasimoto, or a regular Joe in Canada – you must determine what to do after work. One of the most pressing financial issues for retirees is how to create retirement income and more importantly maximize income?
There are many sources of retirement income to consider. I offer you some tips on how to maximize your income in retirement:
Draw CPP early
Canada Pension Plan (CPP) is based on how long and how much you have contributed. The maximum in the year 2012 is $986.67 per month starting at age 65. Back in 2000 the maximum was only $762.92 per month. You can draw CPP as early as age 60 but your pension reduces by 0.5% per month for every month prior to your 65th birthday. In 2012, the government introduced new rules around taking CPP early. To learn more, here are some related articles:
- How to Get Your Canada Pension Plan (CPP) Early
- Should you take CPP early with new changes coming?
- Taking CPP early: The math tells the tale
- The new breakeven points for CPP
Income splitting in retirement can be very significant especially if there is a disparity of income between spouses. CPP splitting allows spouses to combine both their CPP amounts and split it between the spouses evenly. For example, if the higher income spouse earns $700 per month and the other spouse earns $300 per month, CPP allows each spouse to take $500 per month ($700 plus $300 divided by 2).
Pension Income Splitting
New pension splitting rules were introduced in Canada in 2007 and in my opinion, it was one of the most significant tax breaks given to retired couples. Pension splitting allows a spouse to give up to 50% of their eligible pension income to their spouse for tax purposes only. There is no need to cut a cheque or give cash. Pension splitting is a paper transfer done via the tax returns.
- Understanding pension splitting rules
- Three examples where pension splitting makes sense
- Differences between CPP Splitting and Pension Splitting
Use the Pension Income Credit
If you are 65 and you do not have a pension plan from work, consider taking out $2,000 a year from a RRIF tax free. The first $1,000 of income from a RRIF qualifies for the pension income credit.
Related article: Are you taking advantage of the pension income credit?
Watch OAS clawback
The government starts to claw back your Old Age Security at $69,562. The amount of clawback is 15% of any income over $69,562. Basically, you will lose all of your OAS if your total net income reaches $112,966. The clawback is deducted at source and based on the previous year’s income tax return.
Deferring the RRSP is not always the best solution
Conventional thinking is to defer the RRSP to age 71 when the government forces us to start withdrawing from a RRIF. In fact, the best time to take money out of the RRIF is in a low income bracket. Sometimes deferral can push you into a higher tax bracket than your current one. Be careful of rules of thumb.
Related article: Deferral of RRSPs may not be the best strategy
Taxes play such an important role in income planning. When you get the opportunity to determine your fate, you can also do things that are tax efficient and other things that are tax inefficient. After-tax dollars are key and you must understand the after tax ramifications of any retirement income decision.
Related article: Marginal Tax vs Average Tax
Understand investment income
By nature, Canadians are conservative. But holding GICs outside the RRSP can be very ineffective. If you are more comfortable with the security of a GIC, hold it inside the RRSP. Outside the RRSP, you should consider more tax preferred forms of investment income like dividends and capital gains.
Related article: How investment income is taxed