Procrastination happens to all of us. Sometimes it leads to small consequences, like an awkward glance when chores are skipped. Other times, waiting too long can come with a much bigger cost, especially if you have not yet created a retirement withdrawal strategy.
Without a clear plan, you could end up paying more than 50 percent tax on your RRSP or RRIF at death. That is money that could have gone to your family instead.
Susan’s story shows how the timing of your plan can make a meaningful difference in how much tax you pay and how much you leave behind.
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Susan’s Retirement Withdrawal Strategy
Susan is 65 and recently retired. Her current income comes from CPP and Old Age Security, and she’s structured her savings as follows:
• TFSA: $190,000
• RRSP: $900,000
• Non-Registered Account: $500,000
She wants to spend $6,500 per month in retirement. Her current plan is to withdraw from her TFSA first, then her non-registered account, and finally her RRSP once it converts into a RRIF.
When a Tax-Light Strategy Becomes a Costly Mistake
In the early years, Susan’s approach keeps her tax bill low. She lives on government benefits and tax-free TFSA withdrawals. The only taxable income comes from CPP, OAS, and any interest or dividends in her non-registered account.
This works well for the first six years.
But once she turns 71 and begins mandatory RRIF withdrawals, her taxable income increases sharply. A large portion of her RRSP remains untouched and is taxed at the highest marginal rate at death.
Her final tax bill ends up being $598,000, and her net estate is $1.15 million.
A Smarter Retirement Withdrawal Strategy
Instead of starting with the TFSA, we explored a different approach. Susan could begin retirement by targeting a taxable income of $90,000 per year.
This income level keeps her under the Old Age Security clawback threshold, while allowing her to draw a healthy amount from her RRSP at low tax rates.
In this scenario, we assume $40,000 of taxable income from CPP, OAS, and investment income. This leaves room to withdraw about $50,000 per year from her RRSP.
While this strategy increases her taxes early in retirement by roughly $155,000 over six years, it drastically reduces her taxes later in life.
Her final tax bill is reduced to $261,000, and her net estate increases to $1.33 million. That is a $180,000 improvement compared to her current plan.
The Cost of Waiting Just a Few Years
What if Susan waits three years before changing her strategy?
She still improves her outcome, but not as much.
In this case, her estate is projected to be $1.24 million. That is $90,000 less than if she had implemented the new strategy from the start.
In other words, waiting just three years could cost her $30,000 per year.
Final Thoughts
A retirement withdrawal strategy is not something you set once and forget. It should change as tax laws, market conditions, and your own needs evolve.
For Susan, making a change today instead of waiting three years created an extra $90,000 in value. Taking action even earlier would have improved her outcome by $180,000.
If you are in your 60s and have not yet built a retirement withdrawal strategy, now is the time.
