Canada - Start RRIF Early?

[Retire-Canada]

I'm likely to retire around 50yrs old. My RRSP is likely to be ~$700K at that point. I need to start taking money out of the RRSP such that my mandatory withdrawals at 71yrs old are not higher than my needs at the time.

At 71ys old I want:

- $46K/yr total income
- $31K/yr RRIF
- $7K CPP
- $7K OAS

Mandatory WR% at 71 is 5.28% so to get $31K I need $587K in my RRIF when I am 71yrs old.

Given that there are costs associate with pulling $$ out of the RRSP ad hoc each year before 71yrs my thought was to setup a RRIF when I FIRE and start the process at ~50yrs old.

I could start pulling say $30K/yr from my RRIF at 50 and take whatever extra I need to hit my FIRE budget needs for the year of ~$45K. If my RRIF keeps out growing the withdrawals I can just take more and more out each year until projections look like it'll be where I want it to be when I am 71yrs old.

Anyone see a problem with this or have a better way to optimize costs/taxes around my RRSP/RRIF and the mandatory withdrawals?

[Stasher]

Following as I need to start watching on how my withdrawal strategy will work out.
I plan to FIRE this summer (hoping for side $$ so i don't have to touch savings) and will need to seriously look at my plan to pull out cash.

[Heckler]

yup, same question for me.  Where's the Canadian http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ thread?!

I'm debating if I should max RSPs by 48 or start using taxable.  Current plan is to max RSPs (and TFSAs of course) and not use taxable accounts at all. 

[Heckler]

I have 38 y.o. friends who sold out and are homeless, travelling the world couchsurfing on their RSPs on a $30/day budget.  They haven't switched to RRIF because they will likely want to contribute more to RSP 10 years from now.

http://letsridebikes.ca/home/aroundtheworld/

[Stasher]

So at 50 you plan to transfer all your RRSP into a RRIF or is this something you do gradually?
Nice to see that $2000/yr withdrawal tax free
Looks like if you withdraw below $5000 at a time you pay no withholding tax at source (just at end of year)
https://retirehappy.ca/things-you-need-to-know-about-rrifs/

[Retire-Canada]

So at 50 you plan to transfer all your RRSP into a RRIF or is this something you do gradually?
Nice to see that $2000/yr withdrawal tax free
Looks like if you withdraw below $5000 at a time you pay no withholding tax at source (just at end of year)
https://retirehappy.ca/things-you-need-to-know-about-rrifs/

I haven't worked it all out, but I don't have any reason to keep money in a RRSP once I start withdrawing. I haven't seen anything that says that you could not have both a a RRSP and a RRIF prior to age 71. You can't have a RRSP after 71.

So I would likely convert my whole RRSP to a RRIF at 50 and then if I was to earn a big chunk of income somehow and needed to reduce my taxes I would setup a new RRSP account for that money, which can be converted to a RIFF later.

The $2000 pension tax credit happens at 65yrs+ so doesn't kick in right away.

There is no withholding tax on your minimum RRIF payments. If you want more than the minimum there will be some withholding tax over $5K, but it's just a tax installment payment on normal income tax. It's not any sort of extra tax. Depending on how your financial institution tracks things they may start deducting a withholding tax on multiple $5K withdrawals in the same year or they may not.

[MorningCoffee]

Given that there are costs associate with pulling $$ out of the RRSP ad hoc each year before 71yrs my thought was to setup a RRIF when I FIRE and start the process at ~50yrs old.

What are these costs? There are withholding taxes, which are not extra costs. No penalties for withdrawing early.

I see using a RRIF as potentially causing extra costs instead, since you then need to pay taxes on the yearly minimum withdrawals, each and every year, even if you have years where you didn't need money or have other income. RRIF takes away your flexibility...

[RetiredAt63]

Shifting funds from an RRSP can be done early if you see the need for a bit of steady income from a RRIF.  You can keep some of the money in the original RRSP or close it.   If you are still working, or take a year off and go back to work, you can start a new RRSP if you need to.  I did that, and have both.

One advantage of taking the RRIF early is that you start with a small minimum withdrawal that doesn't have much effect on taxes. When people wait until 71 their income takes a big jump.  If you don't need it, you can channel it right into a TFSA or other investment.

[Retire-Canada]

What are these costs? There are withholding taxes, which are not extra costs. No penalties for withdrawing early.

I see using a RRIF as potentially causing extra costs instead, since you then need to pay taxes on the yearly minimum withdrawals, each and every year, even if you have years where you didn't need money or have other income. RRIF takes away your flexibility...

RRSPs are savings accounts not income accounts so to take money out every brokerage I've looked at including the one I am using [Questrade @$50] charges you a deregistration fee every time you want to pull $$ out of a RRSP.

To your other issue. With a $700K RRSP at 50yrs old and a $45K FIRE budget [$31K RRIF + $7K CPP + $7K OAS] my problem will be not taking enough $$ out before 71yrs when mandatory withdrawals happen and getting hammered with taxes at that point. I'm not worried about having to take RRIF $$ out every year because I may not need that $$ in a specific year because I will be forced to at 71yrs anyways and my RRSP is big enough that even pulling my full FIRE budget out from 50-71yrs might not be enough to reduce the value to the level I need by 71yrs old.

The whole point of my desire to start a RRIFF early is to pay less taxes and fees overall.

I should note that if I don't need all the $$ I pull out of my RRIF I will fund my TFSA and my Non-Reg account.

[Stasher]

So basically when I am in FIRE mode it is then time to forecast the amount sitting in my RRSP. This will determine my ability to avoid excess tax withholding and also mandatory withdrawal amounts. It also helps mitigate trading fees of the brokerage within the typically RRSP investment vehicles. I think I'm getting a grip on it all now.

LIRA , so how does this work for withdrawal. I have a small amount ($60K) in a company pension from an employer back in the 90s.

[Retire-Canada]

So basically when I am in FIRE mode it is then time to forecast the amount sitting in my RRSP. This will determine my ability to avoid excess tax withholding and also mandatory withdrawal amounts. It also helps mitigate trading fees of the brokerage within the typically RRSP investment vehicles. I think I'm getting a grip on it all now.

LIRA , so how does this work for withdrawal. I have a small amount ($60K) in a company pension from an employer back in the 90s.

Yes you need to project your RRSP value forward to 71yrs old and then taking into account your FIRE spending targets and other forms of income [CPP + OAS + workplace pension] decide what the value you are targeting for at 71yrs. This process also needs to take into account the income level you contributed at because that determines the tax benefit of your RRSP.

No idea about LIRA. You will still pay trading fees in your RRIF. What you won't pay is a deregistration fee for every withdrawal.

So most of my RRSP $$ went in at an income level of ~$90K so if I can pull it out at an income level of around ~$45K then my tax benefit is ~10% on top of tax free growth of my principal.

[Retire-Canada]

Running a cFIREsim simulation for a RRSP at 50yrs old with a value of $700K and ending at 71yrs while taking out $31K/yr. We see that the median value is $1.16M at 71yrs, which would lead to a minimum mandatory WR of $61K/yr + $14K CPP/OAS = $75K. So that pushes me ~$30K/yr over my desired FIRE income of $46K/yr.



Then running a cFIREsim simulation for a RRSP at 50yrs old with a value of $700K and ending at 71yrs while taking out $45K/yr. We see that the median value is $502K at 71yrs, which would lead to a minimum mandatory WR of $26.5K/yr + $14K CPP/OAS = $40.5K. So that puts me just a few $K below my desired FIRE income of $46K/yr.

That tells me I will likely need to take out ~$45K/yr from 50 to 71 to get to my target FIRE spending level and optimize my taxes paid. It's possible I might need to take out more and also possible I might need to take out a bit less. So if I do setup a RRIF I'll set my income level to $31K/yr and then top it up to $45K to start. As my FIRE progresses I can tweak the top up portion as I see fit.

[SoftwareGoddess]

So basically when I am in FIRE mode it is then time to forecast the amount sitting in my RRSP. This will determine my ability to avoid excess tax withholding and also mandatory withdrawal amounts. It also helps mitigate trading fees of the brokerage within the typically RRSP investment vehicles. I think I'm getting a grip on it all now.

LIRA , so how does this work for withdrawal. I have a small amount ($60K) in a company pension from an employer back in the 90s.

In general, as I understand it, you cannot withdraw money from a LIRA. To do that, you have to convert it to a LIF. Then there are mandatory minimums and maximums on LIF withdrawals. Details (such as earliest age where you can start withdrawing, whether you can transfer money out, and so on) vary by the province that is administering the LIRA. This site has some helpful information: http://www.taxtips.ca/pensions/rpp/unlockingrpp.htm.

[frizzywhiskers]

Hi all!

I used the search function to try and find some threads on this and came across this one from 2017.  Reviving this thread with my questions to see if any fellow Canadians would mind piping in on this with their own strategies.

My husband and I are retiring in the next 1 – 2 years at ages 50 and 52, we will be far from Fat FIRE, but hopefully should have just enough for a comfortable retirement.  Been thinking a lot about how to withdraw funds once the time comes and the most efficient way to do so.

Most of our funds are in 2 categories, RRSPs and LIRAs – we also have some TFSAs but won’t use them for this scenario.  We have been looking at a 2-bucket retirement approach, similar to MMMs guidance in this article.

https://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/

Let’s say for this scenario we have Buckets A and B.  Bucket A contains RRSPs in the amount of $500,000 – to be withdrawn from first upon early retirement.  Let’s say our annual spend is $55,000.  This money would need to last between 8 – 10 years.

Bucket B consists of our LIRA accounts and also has $500,000 in it.  This money will not be touched for 10 years until after age 60, at which time we could collect early CPP and eventual OAS at age 65.  This money should grow to close to $1,000,000 in this time (at 7% return).   We could increase our cost of living to say $65,000 at this time, but this money needs to outlast us.  Assuming $24,000 a year combined in CPP and OAS.

First question is the safe withdrawal rate – obviously we aren’t following the 4% rule here exactly because of assumptions on growth and receiving government pensions – but does this seem feasible?

Second question is how do we withdrawal our first $500,000?  Should we convert to a RRIF at age 50 and do it that way, or should we sell stocks as needed?

Third question is where do dividends get factored in here?  Would we turn the DRIP off and withdrawal from there separately or it’s just added to the pot of funds?

Just curious if anyone has any thoughts on the above, or if you would mind sharing what scenarios you might have planned for a similar situation.

Thanks in advance!

[Retire-Canada]

Just curious if anyone has any thoughts on the above, or if you would mind sharing what scenarios you might have planned for a similar situation.

Thanks in advance!

I just simplified your case to the following and asked cFIREsim what historical results were:

- $1M invested 80/20
- $55K/yr spend including taxes inflation adjusted each year
- $24K OAS/CPP starting 15yrs after retirement
- 50yr FIRE horizon
- gives you a 75% success rate

If I drop annual spend to $50K/yr the success rate goes up to 88%.

If I set your spending as variable. Starting with $50K/yr with a minimum of $45K/yr and a max of $70K/yr the success rate goes to 100% against historical data.

You may want to listen to this podcast:  https://www.choosefi.com/flexible-spending-rules-for-early-retirees/

Obviously what kind of returns you get that first 10 years will determine a lot about your possible FIRE spending. If you get lucky you'll be able to support quite a high annual spend. If you are unlucky you will either need to cut back from what you plan or spend as planned and add some PT income to make up the difference.

Regarding dividends...inside the RRSP it's irrelevant what you do as there is no difference between $1 of dividend income you later withdraw or $1 of stock/bond share being sold and withdrawn.

Once you figure out your plan for your how you'll determine your annual spend budget just withdraw that amount from the RRSP every year until it's depleted.

[frizzywhiskers]

Just curious if anyone has any thoughts on the above, or if you would mind sharing what scenarios you might have planned for a similar situation.

Thanks in advance!

I just simplified your case to the following and asked cFIREsim what historical results were:

- $1M invested 80/20
- $55K/yr spend including taxes inflation adjusted each year
- $24K OAS/CPP starting 15yrs after retirement
- 50yr FIRE horizon
- gives you a 75% success rate

If I drop annual spend to $50K/yr the success rate goes up to 88%.

If I set your spending as variable. Starting with $50K/yr with a minimum of $45K/yr and a max of $70K/yr the success rate goes to 100% against historical data.

You may want to listen to this podcast:  https://www.choosefi.com/flexible-spending-rules-for-early-retirees/

Obviously what kind of returns you get that first 10 years will determine a lot about your possible FIRE spending. If you get lucky you'll be able to support quite a high annual spend. If you are unlucky you will either need to cut back from what you plan or spend as planned and add some PT income to make up the difference.

Regarding dividends...inside the RRSP it's irrelevant what you do as there is no difference between $1 of dividend income you later withdraw or $1 of stock/bond share being sold and withdrawn.

Once you figure out your plan for your how you'll determine your annual spend budget just withdraw that amount from the RRSP every year until it's depleted.

Thank you!  I appreciate your insight on this.  We have some contingency plans in place on this strategy, we will likely have a larger nest egg than $1M, we have tfsas to draw from as well as a few years cash buffer, our home is mortgage free and will likely be downsized at some point in the future.  As well, our bare bones budget is at about $40,000 per year so we have lots of room for flexibility depending on travel etc.  Seems like the 2 bucket approach should work for this scenario and we will hope returns do well over time!

I had been factoring in dividend income as part of the plan but may adjust that based on your comment and just include it in the yearly projections. Thanks!

I will also listen to that podcast too, appreciate that! I’m a fan of choosefi but haven’t been tuning in much these days.

What are your thoughts on converting RRSPs to a RRiF early on?  Seems the most effective and efficient way, but still exploring scenarios!  I’ve been following your updates with interest as I know you have just retired at a similar age!

[Retire-Canada]

What are your thoughts on converting RRSPs to a RRiF early on?  Seems the most effective and efficient way, but still exploring scenarios!  I’ve been following your updates with interest as I know you have just retired at a similar age!

The main benefit to converting the RRSP to a RIFF early is that you avoid the deregistration fee for a RRSP withdrawal. With Questrade that's $50. You could take a full year's spend out in Dec. Pay the deregistration fee, have some taxes withheld and then process your tax return as quickly as possible to get any withheld taxes back sooner rather than later. Say you were taking out $50K paying a $50 fee would be a 0.1% drag. So it's not too bad.

The main benefit to just leaving the $$$ in the RRSP and withdrawing money each year is that there are no mandatory withdrawals until you hit 71. So you can adjust the amount you take out each year both up or down. With the RIFF you will have a minimum withdrawal amount...although at an early stage it won't be a large %.

You can also convert only part of your RRSP to a RIFF prior to 71.

So far I have left my RRSP as is. I have FT and PT income in 2020 so my taxable income is high and I don't want to add anything to it. I'll probably just leave my money in the RRSP and withdraw from it as makes sense to level my income without converting it to a RIFF. As long as I take out any money from the RRSP in one lump sum the fees aren't bad.

Going back to your situation it sounds like you have enough additional assets and flexibility to be successful. That's great! Enjoy your retirement! :-)

[frizzywhiskers]

What are your thoughts on converting RRSPs to a RRiF early on?  Seems the most effective and efficient way, but still exploring scenarios!  I’ve been following your updates with interest as I know you have just retired at a similar age!

The main benefit to converting the RRSP to a RIFF early is that you avoid the deregistration fee for a RRSP withdrawal. With Questrade that's $50. You could take a full year's spend out in Dec. Pay the deregistration fee, have some taxes withheld and then process you tax return as quickly as possible to get any withheld taxes back sooner rather than later. Say you were taking out $50K paying a $50 fee would be a 0.1% drag. So it's not too bad.

The main benefit to just leaving the $$$ in the RRSP and withdrawing money each year is that there are no mandatory withdrawals until you hit 71. So you can adjust the amount you take out each year both up or down. With the RIFF you will have a minimum withdrawal amount...although at an early stage it won't be a large %.

You can also convert only part of your RRSP to a RIFF prior to 71.

So far I have left my RRSP as is. I have FT and PT income in 2020 so my taxable income is high and I don't want to add anything to it. I'll probably just leave my money in the RRSP and withdraw from it as makes sense to level my income without converting it to a RIFF. As long as I take out any money from the RRSP in one lump sum the fees aren't bad.

Going back to your situation it sounds like you have enough additional assets and flexibility to be successful. That's great! Enjoy your retirement! :-)

Fantastic - thank you!  Appreciate your thoughts and time on this!  These are all good problems to solve :-)

[wandering_minstrel]

You can also convert only part of your RRSP to a RIFF prior to 71.

I think this is a key point (and not widely known). I have an RRSP and am opening a RRIF prior to retirement early in 2021. To withdraw an amount from my RRSP, I'll move only that amount of cash (or in-kind funds) to the RRIF and then withdraw it from the RRIF. This avoids any fee charged for directly withdrawing from the RRSP. The balance of the RRIF stays at $0 nearly all the time, so there are no mandatory amounts to withdraw.