Locked-in RRSPs, defined contributions (DC) pensions, and deferred profit sharing plans (DPSPs) all have the same rule requiring conversion at age 71.
The two big questions for a retiree prior to age 71 are: When should I start withdrawals? And how much should I take out each year?
If we take a simplistic approach to the RRSP drawdown, a sustainable withdrawal rate may be 2% to 5% of the account value. That is, between 2% and 5% of the starting account value may be withdrawn each year with subsequent withdrawals increased each year with inflation for life. There are many asterisks depending on age, life expectancy, investment risk tolerance, investment fees and other factors. A sustainable withdrawal rate is more of a theoretical discussion point than a planning recommendation.
A RRSP can be converted to a RRIF at any age. If we look at the RRIF minimum withdrawal tables, we have a series of withdrawal rates that increase with age. In the year a RRIF owner turns 60, their minimum withdrawal is 3.23% of the account value at the end of the previous year. At 65, the rate is 3.85%. At 70, it is 4.76%.
A sustainable withdrawal rate can be impacted by capital inflows a retiree expects in the future. For example, if a retiree expects to downsize their house or sell their cottage, this may mean they should consider extra RRSP withdrawals in their 60s. These extra withdrawals may be manageable because their investments will be replenished in the future, and advisable because the inflow of capital subsequently invested may increase their tax rate in the future. The same may apply if someone expects to receive an inheritance. Obviously, the relative size of the inflow is pertinent.
A retiree in their late 50s or early 60s will have at least two pensions they can choose to defer. Canada Pension Plan (CPP) retirement pension can start as early as age 60 or as late as age 70. Old Age Security (OAS) can start at 65 or be deferred to as late as 70. Pension plan members who worked for companies with a defined benefit (DB) pension may defer the start of their pension payments as well.
Deferring CPP or OAS may be one reason to take RRSP withdrawals early. A retiree who is 65 in 2021 and defers their pensions to age 70 may be entitled to more than $35,000 in combined pensions. This, however, assumes the maximum CPP entitlement and, based on the average CPP paid as of June 2021, the combined pensions may be closer to $25,000 for a lifelong or longtime Canadian resident entitled to the maximum OAS. Both figures assume 2% annual cost-of-living increases.
If a retiree defers this $25,000 to $35,000 of income into their 70s, early RRSP withdrawals may be necessary to supplement cash flow in in the meantime; and even if they aren’t financially necessary, early RRSP withdrawals could help reduce lifetime tax payable by avoiding an increase in tax brackets in the future. OAS pension is also subject to a clawback at higher incomes, albeit not until a retiree’s income exceeds $79,845 for 2021. Early RRSP withdrawals may help avoid this.
