For tied RRSPs, defined contribution plans (DC) and deferred profit sharing plans (DPSPs), the same rule applies, requiring conversion at the age of 71.
The two big questions for a retiree before the age of 71 are: When should I start drawing? And how much should I lose weight every year?
If we take a simplistic approach to using the RRSP, a sustainable payout rate can amount to 2 to 5% of the account value. This means that between 2% and 5% of the initial account value can be withdrawn each year, with subsequent withdrawals increasing each year with inflation for life. There are many asterisks based 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.
An RRSP can be converted into an RRIF at any age. If we look at the RRIF minimum payout tables, we have a number of payout rates that increase with age. In the year in which an RRIF holder turns 60, their minimum payout is 3.23% of the account value at the end of the previous year. At 65 the rate is 3.85%. At 70 it’s 4.76%.
A sustainable payout ratio can be influenced by capital inflows that a retiree expects in the future. For example, if a retiree is expecting to downsize their home or sell their cabin, it may mean they should consider additional RRSP withdrawals in their 60s. These additional withdrawals can be manageable because your investments will be replenished in the future and advisable because the inflow of later invested capital can increase your tax rate in the future. The same can apply if someone is expecting an inheritance. Of course, the relative size of the inflow is relevant.
A retiree in his late 50s or early 60s has at least two pensions to defer. The Canada Pension Plan (CPP) retirement pension can begin at the age of 60 or 70 years. Old-age insurance (OAS) can begin at the age of 65 or be postponed until 70. The defined benefit (DB) pension can also postpone the start of your pension payments.
Deferring CPP or OAS may be a reason to make RRSP withdrawals early. A retiree who will turn 65 in 2021 and postpone their retirement to age 70 may be eligible for more than $ 35,000 in combined pensions. However, this assumes maximum CPP eligibility, and based on the average CPP paid in June 2021, the combined pensions for a lifetime or long-term Canadian resident eligible for the maximum OAS can be closer to $ 25,000. Both figures assume an annual increase in the cost of living of 2%.
If a retiree shifts that income from $ 25,000 to $ 35,000 into the 1970s, early RRSP withdrawals may be required to replenish cash flow in the interim; and even if financially unnecessary, early RRSP withdrawals could help reduce the lifetime tax payable by avoiding an increase in tax brackets in the future. The OAS pension is also subject to clawback for higher incomes, but not until a retiree’s income exceeds $ 79,845 for 2021. Early RRSP references can help prevent this from happening.