Five essential considerations for developing an efficient decumulation plan in Canada

Welcome to Part 3 our four-part series on navigating the complexities of retirement income and finances in Canada. This series offers insights and strategies to help you manage your retirement income in a tax-efficient way. 

• Part 1: Discover five key strategies for tax-efficient retirement income planning, supplemented with “Understanding your sources of retirement income” 
• Part 2: An introduction to specific tax strategies you can use to help you keep more of your retirement income in your pocket 
• Part 3: Explore essential considerations for developing a tax-efficient decumulation strategy 
• Part 4: Coming soon - an in-depth look at CPP and OAS benefits 
  
  

Retirement is one of life’s most exciting milestones. After years of hard work and careful saving, you’ve finally reached this moment – but did you know that it’s important to keep planning well into your retirement years? 

A solid decumulation plan can help you stretch your savings and even reduce the amount of tax you pay in retirement. 

So what exactly is decumulation?  

Decumulation is the process of converting your retirement savings into income. In Canada, retirees face some unique challenges and opportunities when it comes to decumulation. From tax considerations to maximizing government benefits, there’s a lot to think about.  

Plus, with the average life expectancy in Canada close to 82 years old (Statistics Canada, 2022), it is possible you could be retired for 20 years or more, so it’s crucial to map out a plan for how you’ll spend your savings.

Here’s what you need to know to create a smart decumulation plan and make the most of your retirement income. 

1. Understand tax efficiency

In Canada, tax efficiency plays a crucial role in helping your retirement income go further. Under the Income Tax Act, registered investment accounts offer tax benefits, letting you defer or reduce the amount of income that can be taxed on investments, capital gains or dividends.  

Developing a tax-efficient decumulation strategy can help minimize the amount of tax you pay and extend your retirement savings. Some specific strategies include: 

• Optimize registered and non-registered accounts -Consider the tax implications of different retirement income sources, such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), and Tax-Free Savings Accounts (TFSAs). The order in which you access these products can make a big difference in the amount of tax you pay. In most situations, the CSS advisory team recommends accessing registered products like RRSPs or RRIFs first, then non-registered products such as cash accounts, and lastly TFSAs as a tax-efficient strategy. However, we encourage you to look at your own unique situation to determine what works best for you. Your situation may differ significantly from someone else’s.

• Understand your marginal tax rate - Your marginal tax rate is the amount of tax you pay based on your income. It is important to understand your marginal tax rate now and your anticipated marginal tax rate in the future.  Ask yourself how different tax strategies like pension income splitting can affect your marginal tax rate – is there an opportunity to perhaps reduce the amount of income tax you pay by allocating income to a spouse or common-law partner who has a lower marginal tax rate? Asking yourself these types of questions when preparing your decumulation plan can help you retain more of your retirement income.

• Be aware of thresholds - Being aware of thresholds with respect to retirement income sources can also help reduce the amount of income tax you pay. For example, if your annual income exceeds $90,997, part of your Old Age Security (OAS) pension may be reduced or “clawed back.” A decumulation plan can help you minimize the impact of the OAS clawback so you don’t have to pay more tax than necessary. 

For more information on specific tax strategies you can use to help you keep more of your retirement income in your pocket, see Part 2 of this article series.   

2. Make the most of government benefits

Canada offers various government benefits designed to support retirees, including the Canada Pension Plan (CPP) and Old Age Security (OAS). It is important to know when you’re eligible to access these benefits, how much your payment will be, and how timing affects your payments. 

While you can start accessing CPP as early as age 60, your payment will be higher if you delay starting until after age 65 (keeping in mind you can only defer CPP and OAS until age 70).  

Also keep in mind that CPP and OAS are not designed to replace your entire pre-retirement income – only a portion. Your savings in the CSS Pension Plan and other investments will also play a role in supporting you during your golden years. A decumulation plan can help you determine the optimal time to access these benefits so you can maximize your retirement income stream. 

By planning to optimize your CPP and OAS benefits in combination with other sources of retirement income, you can enhance your overall financial stability and wellness. 

3. Strategically access annuities and workplace pension plans

Determining when the best time to access annuity products and pension plans can help you supplement other retirement savings and significantly impact your decumulation plan.  

As a member of CSS Pension Plan, you may qualify for early retirement at age 50 or even earlier if your age plus years of continuous service with one or more participating employers equals a factor of 75. 

Generally, your account balance grows over time. Delaying retirement tends to increase your retirement income for two reasons: 

• your account balance is likely to be higher 

• the length of time that you'll need a retirement income is likely to be shorter 

The size of your balance at retirement will be an important factor when determining how much your monthly retirement income will be. If you retire at age 50, for example, your expected monthly pension payments will be lower than if you retire at age 60. 

Your decumulation plan can help you assess the trade-offs between accessing your pensions and annuities earlier or later.    

4. Create a budget

Creating a budget for retirement is an essential part of a solid decumulation plan. Be sure to allow some flexibility in your budget for unexpected events, like home repairs or health issues. It is important to have the ability to adjust your decumulation plan if you need to, whether that means changing how much income you withdraw or adjusting your lifestyle. Your budget should be realistic for your needs, so be honest with yourself to make sure you can stick to it. 

Two big concerns for retirees are inflation and outliving their savings. When deciding how much retirement income to withdraw, your budget should factor in inflation to keep your purchasing power strong over time. In accordance with industry standards surrounding longevity risk, plan for the possibility of needing income until at least age 90. Options like longevity insurance or hybrid annuities can also help protect against the risk of outliving your savings.

 5. Make the most of government benefits

It’s essential to continue planning throughout your retirement and regularly review your decumulation plan – especially if you receive retirement income from a variable product, such as CSS’ Variable Benefit (VB) payments. Life is dynamic, and your financial needs and goals may evolve over time. 

In the early years of retirement, your plan might focus on enjoying newfound freedom. However, as time passes, significant life events – such as illness or the loss of a spouse – could lead to shifts in your financial outlook, including tax implications. You may also reconsider your wishes regarding inheritance and estate preservation, which can change as your circumstances do. Revisiting your decumulation plan periodically ensures you’re prepared for the unexpected. 

Conclusion

Decumulation can be complex, but creating a personalized retirement plan is a great way to simplify the process. The online myCSSPEN Compass® Retirement Income Planner can help you decide when and how to draw from your retirement income sources. Our advisory team is also available to guide you through this process if needed. 

For more information or to book an appointment with a CSS Retirement and Pension Advisor, please contact us.