Douglas,* 66, is getting mixed messages from advisers. His financial adviser wants him to leave the money he has in his registered accounts to grow while his accountant says it is time to start drawing down those funds to minimize tax.

Retired since 2020, Douglas lives in Ontario with his wife of seven years, Anne,* who is also retired. This is a second marriage for both Douglas and Anne. They purchased their forever home together — now valued at $900,000 and which they each own equally — are debt-free, keep their finances separate and contribute to shared expenses. So far, Douglas’s non-indexed employer pension and government benefits have met his cash flow needs, but he is concerned about the growing impact of

inflation

.

“We have a great life together,” said Douglas. “We travel a lot, and plan to continue to do more of the same.” Douglas’s annual expenses are about $43,200 including $6,000 for travel. His annual income is about $48,300 before tax. This includes about $24,000 from a locked-in retirement account (LIRA) that is not indexed to inflation, $3,380 in employer benefits, $12,100 in

Canada Pension Plan

(CPP) benefits and $8,600 in

Old Age Security

(OAS) payments. Anne’s annual income is similar.

Douglas’s investment portfolio includes about $240,000 in

registered retirement savings plans

(RRSPs), $490,000 in a LIRA and $28,000 in a

tax-free savings account

(TFSA) largely invested in stocks and some equity funds. He dipped into his TFSA and a non-registered account to help one of his children and is now working on building both back up. He contributes $300 a month to his TFSA. He also has an emergency fund of about $6,000 in a savings account.

“Does it make financial sense to convert my RRSP to a

registered retirement income fund

(RRIF) now and begin withdrawing funds to increase TFSA contributions and to rebuild my non-registered investment account?” he asked.

A father of two adult children, stepfather to Anne’s two adult children and grandfather to six grandchildren, Douglas is also focused on their future. “What are the best strategies to preserve or grow my portfolio to ensure I can live comfortably and leave an estate for my children?”

What the expert says

Barring any major changes to his current lifestyle and assuming an average long-term annual return of seven per cent on his nearly $760,000 equity-based portfolio, Douglas can afford to withdraw an additional $4,500 a year — the maximum amount he can withdraw without pushing him into a higher tax bracket — or 3.5 per cent of his investments (up from the 3.2 per cent he is currently withdrawing). According to a long held general rule of thumb for

retirement

spending, withdrawing up to four per cent of your total investments has been sustainable 97 per cent of the time in the past 150 years, said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger.

That said, Rempel’s best advice for Douglas is to wait two years, just before he turns 68, to start withdrawing $4,500 a year more from his LIRA – and only his LIRA. “There doesn’t seem to be a reason to start and pay tax on these funds when he doesn’t need the money and it can continue to grow,” said Rempel.

“The reason he should wait two years specifically, instead of doing it now, is interesting. In general, it is worthwhile paying 20 per cent tax now to avoid 30 per cent tax in less than five years, but not really for more than five years from now. Douglas will be pushed into the 30 per cent tax bracket at age 72 (six years from now) when he is required to have converted his RRSP to a RRIF. That is why it should be worthwhile for Douglas to withdraw the funds at age 68, but not now at age 66.”

When he does withdraw these additional funds, the extra $4,500 a year will trigger $900 (20 per cent) in tax amounting to $3,600 a year after tax, allowing him to double his monthly contributions to his TFSA from $300 to $600.

As for his RRSP, Rempel said Douglas should wait to convert to a RRIF until he is required to at age 71. “There is no tax advantage to start withdrawing funds from the RRIF before then. Any extra money he wants can come from the LIRA while still remaining under the 7.5 per cent maximum life income fund (LIF) — the account used to manage LIRA funds — withdrawal limit. The LIRA/LIF is less flexible than an RRSP/RRIF, so he should only withdraw from it.”

To address Douglas’s concerns about the high

cost of living

, Rempel said he can increase the amount he withdraws from his LIRA by the inflation rate.

“Douglas could live a bit more comfortably now by withdrawing an extra $4,500 a year from his LIRA and continuing to increase his withdrawals every year by inflation. That would still be a sustainable long-term withdrawal,” said Rempel.

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“Since he is only withdrawing 3.2 per cent of his investments per year, while they are expected to grow about seven per cent per year (or possibly more) long-term, his $758,000 investments should grow to more than $1 million by age 75 and about $2 million at age 90,” Rempel said. “In total, his growing portfolio and home value should be a nice estate to leave for his children and grandchildren. They also provide a very comfortable margin of safety, in case he needs more money in the future or has expensive health issues, or wants to move to a more expensive retirement home in the future.”

*Names have been changed to protect privacy.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).