How to keep more money in your pocket when you retire

It's essential to have a good strategy for drawing income on your capital, while keeping your tax bill as low as possible.

Angela Iermieri | Financial planner | Desjardins group 

The key is tax efficiency. In your retirement, it's essential to have a good strategy for drawing income on your capital, while keeping your tax bill as low as possible.

Here are 4 benefits of having a good withdrawal strategy and keeping it up to date. 

1. Optimize your investments
You pay tax on withdrawals from your RRSP, or any other deferred tax account, and on the sale of shares with capital gains. It's important to consider the impacts of tax on your income when you decide on the timing and the source of withdrawals.

2. Adjust your strategy to your needs
When you're withdrawing funds, market performance, and especially market volatility, will affect the value of your portfolio and the amount you can hope to withdraw in the future. Make sure your expected returns are realistic, based on the types of investments (or asset allocation) in your portfolio. If your projected income is based on over-optimistic returns, you could end up depleting your capital prematurely.

3. Make sure your retirement capital grows
The asset allocation in your portfolio will affect your returns. If your portfolio is mainly composed of fixed income, rather than growth funds, then the economy and interest rates will have an impact on the rate of return you can realistically expect. 

4. Think about the tax bill after you die 
After your death, the law assumes that all your assets have been sold at fair market value, and the estate will need to pay tax on any capital gains. It's a really good idea to plan ahead and decide who will inherit your assets and how they will be shared, so you can develop a strategy to reduce or postpone the income tax payable by your estate.

5. Make a plan and update it regularly 
For a withdrawal plan to be effective, you need to stick to it. But it's just as important to review your strategy from time to time to take advantage of any available tax relief or tax credits. This will help you make the most of your retirement capital so it lasts as long as possible. 

Your portfolio withdrawal strategy should be flexible enough to allow you to adjust the income you draw. It's important to take account of inflation and the different stages of your retirement because some retirement years will be more active--and more expensive--than others. 

Remember that a financial advisor is your best ally when it comes to developing and updating your financial plan. 

3 more strategies to reduce your tax bill 

If you live in Quebec, you might want to consider this investment option, when available, if it fits in with your investor profile. For example, if you want to diversify your portfolio and you're looking to invest for the long term, the Quebec government awards an additional 35% tax credit on the amount invested.

These investments can offer you a steady income and tax efficiency, based on your investor profile. You can build a fund portfolio with the option of receiving regular monthly income, and enjoy greater tax efficiency, while taking advantage of growth potential and personalized income. 

3. Pension income splitting
Income splitting can offer big tax savings for retired couples where one partner has a higher income than the other. The partner with the higher income can allocate up to half their income to their partner. But money doesn't change hands--pension income splitting is done once a year in your tax return. This strategy is available to beneficiaries of employer pension plans or on RRIF payments for federal purposes. However, for the Quebec provincial income splitting, you must be at least 65 years old to benefit from it. 

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