Life after RRSP

We spend our lives trying to contribute as much as possible to our Registered Retirement Savings Plan (RRSP). We are strongly encouraged to start doing so as early as possible in our young adult life. It's all well and good to spend our lives trying to grow our RRSP, but how do we use it once we retire? In short, what is life like after the RRSP?

Generally, there are two ways to build tax-free savings for retirement.

When you are self-employed or employed in a company that does not offer a group pension fund, you normally contribute the maximum to your RRSP to build up a fund that will allow you to maintain a certain lifestyle when you retire. This is the case for a growing number of workers in Quebec.

When you are an employee and contribute to a private pension plan, the amount of your RRSP contributions is limited and will depend on the amounts that you and your employer have paid into your pension fund.

That said, even if the legal retirement age (for now) is set at 65, you can contribute to your RRSP up to the age limit of 71. Once you reach this venerable age, you must transfer all the sums accumulated in your RRSP to a RRIF (Registered Retirement Income Fund).

The Quebec and Canadian tax authorities require taxpayers to withdraw a portion of their RRIF each year starting at age 71. The mandatory withdrawal percentage has been set at 7.38% of the total of your RRIF for the first year. During the subsequent years, the mandatory withdrawal percentage increases by a few hundredths of a point per year. It thus increases to 7.48% at age 72, then to 7.59% at age 73, and so on for the following years.

Caroline Nalbantoglu, a financial planner at CNal Financial Planning, suggests that retirees aged 65 and over who must rely solely on income from the Quebec Pension Plan and the federal Old Age Security pension to meet their needs immediately transfer their RRSP to a RRIF.

"At 65, you are still fairly active, so you have greater financial needs than at 80. By transferring their RRSP to a RRIF, a retired couple can therefore withdraw the minimum allowed by law and share their income, which will reduce their tax payable," she observes.

Miguel Mediavilla of Globevest Capital believes that it may be advantageous for a retiree with little money to wait until the age of 71 before transferring his RRSP to a RRIF.

"From age 65 to 71, he will be able to benefit from the Guaranteed Income Supplement which is added to the Old Age Security pension. That's more than $6,000 per year that he will be able to receive before starting to cash in his RRSPs," he suggests.

"Those who can wait until age 71 before transferring their RRSP to a RRIF can, however, try to take advantage of the delay to make their RRSP grow more by taking a little more risk than if they were retired. Obviously, this depends on the household's level of debt, its standard of living, and its risk tolerance," also specifies Ms. Nalbantoglu.

Whether your funds are still in your RRSP or you have transferred them to a RRIF, they are still expected to produce a minimum return.

"Even in retirement, you have to look for some growth, but it is obvious that you have to reduce your exposure to risk to a minimum. The vast majority of retirees' portfolios are balanced portfolios with a certain weighting in the stock market but in very conservative funds," emphasizes Caroline Nalbantoglu.