Managing Your Retirement Money

I’ve noticed something since being retired that doesn’t get discussed that much among personal fiance bloggers. Prior to early retirement we tend to focus exclusively on growing our net worth. It’s all about the increasing balance of our investment accounts and paying off debt. Yet after hitting my ‘number’ and going into my semi-early retirement I have noticed the worries and concerns don’t even really look at my net worth so much. Instead I’m now focusing on my cash flow.

Which when you think about it makes sense.  After all if your income from your investments and other sources continues to exceed your spending over the long term you likely won’t ever run out of money. So while I still worry about living within my means it is now more focused  on managing our cash flows. Of course if your cash flow is constantly negative then you may see your net worth declining if that negative cash flow exceeds your investment growth.  But in short if you are constantly in a positive cash flow you rarely need to look at your net worth anymore.

So this is the game I as playing right now. Can our dividend, interest and small business income exceed what we spend on average over a year?  With that in mind I thought I would explain a bit how I plan to manage our money going forward.

First off let me state that I don’t plan to look at my accounts daily or do anything stupid like day trading.  Our portfolios are designed to require very little management from us on a day to day basis and I want to keep it that way.  But of course this doesn’t exclude you from doing some work on the investments, it should keep the amount of time required to a low level of an hour or two per month with one notable exception.

That exception is that each year around the start of November I would do a little maintenance on our accounts and move money around as required to rebalance the RRSP accounts which are all invested in index funds (but I only do that when the gains are around 20% or so and then shift a chunk from equity to bonds).  Why late fall/early winter?  Well because that allows me to take money out of the RRSPs if required with a fairly accurate estimate of any earnings we have made for the calendar year.   This is important as any RRSP withdrawals are subject to a withholding tax which is used as an estimate of our income tax owing on the withdrawal.  So by doing near the end of the year we only give the money to the government until we file our taxes the following spring and we will typically get most of that money back as a tax refund since our actually income tax bill should be very low.  Please note for 2017 I didn’t actually do this since I have pre-saved our expenses for 2018.

On a day to day basis we normally use our cash in the high interest savings account to cover expenses.  To simulate a pay cheque we have setup auto transfers twice a month to the main chequing account.  For now I’ve defaulted that amount to $1000 twice per month.  If I don’t use the money in a given month I just push it back over the high interest savings account when I calculate our net worth at the end of the month (and write a blog post about that).  Also keep in mind that our cash position in our high interest savings account when I left work in the fall of 2017 was at over $50,000 which is a bit larger than normal.  This is because it was also holding our 2018 TFSA contributions of $11,000 in that account.

In addition,  twice a year we drain off the cash sitting in our TFSA and taxable accounts and put that into the high interest savings account to pay for our day to day spending.  We don’t reinvest our dividends and distributions, but rather just let them accumulate in those accounts during the year.  I plan to take the money out at roughly six months apart.  One will be in November during my annual financial RRSP balancing session and the other will be in May.  At the moment those dividends are just under $10,500 per year (this recently just went up since Husky Energy just started paying their dividend again).

Meanwhile my wife’s daycare business transfers a monthly amount over to house once a month ( this is currently $550/month).  Then towards the end of the year she also does a lump some payment to cover the cost of her Rough Rider season tickets.  I had previously offered her the option to retire with me but she decided she wanted to work for a bit longer.  With that extra income in mind I left work about a year earlier since I didn’t need the capital to cover off her income right away.

Meanwhile any cash I earn (from writing or what ever I do that happens to generate some income) I’m putting that into our slush fund for vacations, house renovations and car replacement.  I retired with a $20K slush fund balance in that which is also stored in our high interest savings account.  So with our current draft taxes of 2017, I should see a refund of over $4000.  I’ve already decided to put 90% of that towards the slush fund and put the other 10% to buying some equipment to set me up for all grain beer brewing.

While we are currently getting some Child Tax Benefit cash each month that is currently moved directly to the kids’ RESP account.  That will end this year after the RESP account gets to around $80,000 (which is our overall savings goal for that account).  At which point we will stop the transfers and just roll that cash into our monthly spending on the kids (currently this is mainly clothes for my 13 year old who seems to be getting taller each week (don’t get me started on what he is doing to our grocery bill) and then activities like swimming lessons).

Of course all of the above is more or less my planned framework.  Reality will be different.  Case in point, after I file my taxes for the 2018 tax year I fully expect our Child Tax Benefit to increase dramatically in July 2019.  This will allow us the odd situation of really not having to touch the RRSP at all if we so choose.  So even when I go to take some money out of my RRSP this November I really won’t need all that much.  This is part of our longer term plan to account for my wife’s retirement in the future.  By not touching that RRSP accounts for a few years they should grow enough to cover off my wife’s business income to the house (at least that is the plan).

This of course then brings into the eternal debate do you take money out of your RRSP up to your basic deduction each year even if you don’t really need the money?  Why would that be a good idea?  Well because that money will effectively be a ‘tax free’ withdrawal from your RRSP.  Yes you will have the withholding tax applied initially but after you file your taxes you will get the money back.  But if you don’t need the cash you will likely put some into your TFSA but that amount is less than the basic deduction amount.  So then you end up with having to start a taxable account and potentially have a tax liability with that.  Which then leads you to wonder if you should just take out your TFSA contribution plus any cash you need to live on in the next year and quit at that.  To be honest, I haven’t fully decided on this yet.  I’m currently leaning towards taking less than from my RRSP and dealing with slowly melting the RRSP down and moving it into the TFSA.  In my wife’s case, this gets even more messy because of your business income will likely be much higher than mine and closer the the total basic tax deduction.  And we won’t touch her spousal RRSP until 2019 at the earliest to ensure any money we pull from that account is not attributed back to me  – you need to wait three years from the last deposit to make sure that doesn’t occur which is why I stopped putting money into her spousal account literally years ago.  I know it is confusing, but those are the rules so I just work within them.

So hopefully all of that helped you understand how we manage to pay for our expenses now that I don’t have a job.  I suspect that I haven’t been clear on everything so please do ask any questions in the comments.

10 thoughts on “Managing Your Retirement Money”

  1. Hey Tim, I love this post. I hope to RE in about a year from now, and have been thinking about some of the items you mention. Particularly the RRSP withdrawals, even if you don’t need them.

    My thinking is that we will draw ours down and put as much into TFSA’s as we can and then taxable accounts after that. The way I see it, say you have $12,000 exemption limit, $5,500 goes into TFSA, leaving $6,500 for taxable. Only 50% of the gains on the $6,500 is taxable, which is bound to be significantly less than the RRSP withdrawal taxes you’d pay on $12,000 (plus whatever it’s grown to when you do finally take it out) vs. 50% of the growth on $6,500.

    Another thing to think about is how large is your RRSP going to be when you hit 71 and have to withdrawal from it? I’d rather avoid being in a scenario where I’m forced to withdrawal RRIF money at a pontentially high rate (think CPP, OAS income as well).

    Also, our personal strategy will be to hold dividend yielding stocks in the taxable accounts to further reduce the tax liability.

    Anyways, just how I think about it. Thanks for sharing your info!

    Dave

  2. Always draw down the RRSP whenever possible. Put the extra cash back into the TFSA, you will almost always have room.

    TFSA room is $5500/year plus the amount withdrawn in a previous year. If you have already taken dividends in 2017 from the TFSA you have extra room.

    If you need a taxable account, the dividends (Canadian) are tax free; technically -0.72%. So your Husky stock would be better in a taxable account (in retirement), leaving more room in a TFSA for American ETF’s. When its time to melt down the taxable account, the first $23,000 in gains each year is tax free for each of you (assuming no other income). That’s on top of the return of capital and free dividends. Can you live on $50,000 a year? 😉 The taxable accounts are better than RRSP accounts in retirement, it’s a weird shift.

  3. Tim, I live off my dividends, too, since I retired nearly 10 years ago. But some retirees I read about in my early retirement and investment forums live off the gains in portfolio value instead, or as part of their cash flow. I think it is a less certain way of funding one’s retirement, but having some of your portfolio in growth-producing assets is a good hedge against inflation, while dividends by themselves are not necessarily so.

  4. I echo the other comments on here. I would also suggest you harvest the interest / dividends monthly rather than at the half year mark. It is dead money in the brokerage accounts and at least you get something in the HISA. Better you get the interest than the firm keeping it and the effort on your part should only take a few mins per month. If the numbers are consistent you can set up an automatic transfer or if the firm offers it, an automatic sweep which does all the work for you.

  5. I have been thinking about some of the same issues as we approach FIRE. My plan is to also convert the RRSP to a RRIF early (around 49yoa) to minimize tax as I shift the money over to my TFSA. I do have one question perhaps someone can help me with. Are early RRSP withdrawls subject to CPP? I almost hope that they are as early retirement will dramatically drop the CPP payments one will receive once eligible. Certainly taking CPP early would seem to make sense, as every year that goes by is another ‘dead’ year of no CPP contributions.

  6. @Michael
    Just shift 2k a year to your RRIF,from your RRSP – then you can withdraw that 2k from your RRIF tax free assuming you have no other pensionable income coming in. Thats the difference between the RRSP and the RRIF before age 71. RRIF gives you a nice first 2K tax free withdrawal each year.

    RRSP and RRIF withdrawals are not subject to CCP contributions.

  7. Congratulations on living the life that you want to!

    For a few years now, I’ve been pretending/planning for my husbands retirement (I’ve been a homemaker since 2005). He’s not ready yet (even though we are ready financially). This year, I’m withdrawing the dividends (in our taxable accounts only) each month and (seeing if) we can live off of them. If everything goes according to plan, we should be more than good and even save a little! Our kids CCB, CPP (he’s eligible now) and OAS (in 3 years) will be the icing on the cake as well as any other income we generate (we’re always doing something).

    You mention a “HISA”. Who are you invested with and at what rate? I opened a EQ Bank account in November and am pleased with the 2.3% but am always interested in staying on top of what offers are out there.

    P.S. Do you have a subscribe option on your blog?

    Besos Sarah.

  8. Sounds like you have it all mapped out. Working in the finance community for 20 years, I too have had a lot of advice. Investment portfolios change all the time. Treasury bills may be good for several years. Some time later they are not paying out. As long as you have a workable plan you can’t go wrong.

  9. Thanks everyone for the input. I’ve reconsidered the idea of taking extra now out of the RRSPs and parking it in a taxable account.

    I also like the idea of taking out the money from the TFSA’s a bit more frequently to earn some interest off it. But I don’t want to drop it down to monthly. So I’m considering a threshold amount of $1000 or more to make the move.

    As to HISA I’m just with out local bank and the rate is fairly bad. I should do some shopping around for at least some of that money for a higher rate.

    I think that was all the questions. Thanks again everyone.

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