Posted by Tim Stobbs on June 23, 2016
On my last post, Sherry asked for a bit more details on our investments and how that relates to our plan in retirement. So basically, now that we have built the money up, how exactly does one use it to live on?
To be honest, while I had some vague ideas on this before I only really got to thinking about this in detail this year. So I can say I’m not firmly decided on all of this, but this is the current plan. Please note, I’m not predicting the exact amount per account but I will give approximates if I can. Our money at the end of this will be divided into the following groups:
- Pension and Locked In Funds – the stuff with age limits on when I can actually use it.
- RRSPs – Which actually don’t have an age limit, they just function like taxable income when you take the money out.
- TFSAs – Which can be pulled out with no tax implications.
- Taxable Investments – So your basic investment account where you pay capital gains if you sell something for a profit.
First up is the pension money, which the vast majority can not be accessed until I’m 50. The good news on that particular account is when I leave work I am allowed unlock my voluntary contributions and move it to an RRSP. Crudely this is about 1/3 of that accounts value (current value is ~$140,000). I do intend to do this to allow the most flexibility on that money. Yet even with that option I will likely have more than $100,000 when I retire that I can’t use for the first 10 years or so. So the trick for this account is to basically leave it alone and let it grow until I need it more a more traditional retirement later on. I intend to leave my remaining pension right where it is for the long term as the fees are low and I’m not required to move the money out of the pension plan.
Next up is the RRSP accounts (current value is ~ $130,000) which I will be trying to reduce the tax on these account withdrawals as much as possible. So even if we don’t need the money I will likely take out the full amount up to our basic income tax deduction each year (if our work income doesn’t make us use that up first). Any unused money would then just get shifted over the TFSA accounts. The other side issue with the RRSP accounts is I’m accepting the fact I may be using some of the principle in these accounts to offset the fact I can’t access the pension money. The RRSPs are all index funds which do spin off some income but the vast majority of the money here will come from selling small amounts of the funds annually (or semi-annually – I’m still debating this point as there is the issue of withholding amounts for tax purposes on money taken out of an RRSP). So the hope is the mainly use the capital gains in these accounts, but as I mentioned I’m okay dipping into the principle until I turn 50.
The TFSA accounts are a different beast all together. These accounts are invested in individual dividend paying stocks and the plan here is to never touch the principle amount but rather just harvest dividend payments out of the accounts. Yields here are averaging just over 5% currently on about $130,000 right now (so that will be slightly higher when I retire). The longer term plan for this account is to grow it as we draw down the other taxable and RRSP accounts when we have contribution room available in the TFSA accounts. That additional money will likely get used to cover living expenses, its just a matter of when we use the money.
Then the last pool of cash is the taxable investment account. Currently this is rather small (~$35,000), but since we are maxed on TFSA and RRSP contribution room so it will grow to be around $60 to $70k. Yet a portion of that will be our emergency cash float which will allow us to not pull money out of investments for up to a year in the event the markets take a major decline. In the long term it would be nice to move that cash float into the TFSA from the taxable investment account, but given the low tax implications of that we will likely not do that anytime soon or do it slowly over a number of years. Except for the emergency cash float we will use up this money towards the early part of our retirement to ensure we keep any taxable capital gains to a minimum and again if required I would be okay using some of this principle money.
So long story short, we mainly plan to live on capital gains and dividends, but I am okay touching a bit of the principle if required. I will actively avoid doing that (by having some employment income during the first five years), but as I previously noted I am fine with downsizing the house in the medium term to shore up the investments if required.
Hope that helps. Let me know if you have any questions.