Unintended Consequences of Bad Advice

Fee-only Retirement Income Planners, Calgary

Age 65 is too old to be following bad advice.

Based on the advice from their bank, they converted all of their respective RRSPs into RRIFs. They had large RRSPs and now that they were converted to RRIFs this meant that they were required to take a minimum income payment each year. Being over 65, they both qualified to start taking their OAS, so they had started that as well. It seemed reasonable, but here's the problem. They decided to sell their business which required them to declare all of the proceeds of the sale as income in that year. The unexpected consequence was a huge tax bill because their income suddenly spiked temporarily. They also lost all of the OAS for one full year because their incomes were above the OAS $75,000 threshold. That alone was over $14,000. 

All of the above happened because of bad advice and poor planning. And, all of it could have been easily avoided. It's the law of unintended consequences and it will bite you in the arse every time. Every financial decision you make will have an impact on other parts of your financial situation. For example, deferring CPP and OAS will result in you getting more money from it, however, getting more money could also put you into a higher tax bracket and result in paying more income taxes and experiencing an OAS clawback. In this case, getting more can actually result in getting less in the long-term.

Here are some other examples. Conventional wisdom suggests that you should wait until age 71 to start taking income from your RRSPs so that you can take full advantage of the tax deferral process. Once again, this can have a negative impact on your taxable income and cause you to pay more taxes and possibly have an OAS clawback. Receiving money in one hand and then having to give it back with the other hand is not a sound financial decision.

Most people will have numerous sources of income in retirement. You may have an RRSP, TFSA, LIRA, LIF, Group RRSP, Defined Benefit Pension, Defined Contribution Pension, CPP, OAS, GIS, Stocks, Bonds, Stock options, RSUs, Employment income, Business Income, Retained earnings, etc. If you are married, you can multiply that by 2. It's not unusual for people to have up to 20 different sources of income in retirement. The more sources you have, the more coordination is required in order to ensure you get the most cash flow, in the most tax-efficient manner and have complete confidence your money will last. It's been my experience that most people forfeit a lot of income from poor planning and are paying too much tax. This can easily be avoided with pre-retirement and post-retirement planning.

Here are a few key principles to keep in mind when it comes to organizing your retirement income. 

1. There are no cookie-cutter plans. We rarely see two couples with exactly the same circumstances. It is so important that you do not make major decisions about any one aspect of your income sources. For example, taking CPP at age 60. This may be a good idea for some people and for others, it will make sense to delay until age 70.

2. As a rule of thumb, you will want to use your less flexible and less tax-efficient sources of income first. In this case LIRAs, RRSPs and government benefits can form the base of your income in the early years and TFSAs and non-registered sources later in retirement.

3. Guaranteed sources of income need to form the base of your cash-flow. This can be a LIF, government benefits, DB pension, Annuities. Your total income need in retirement might be $80,000, however, how much do you require to meet your basic living needs? It may only be $40,000. If that is the case, we would recommend that you cover that base from guaranteed income sources. The rationale being that if the markets are performing poorly, you will not want to take out money while your accounts are down in value. We all quickly forget that the markets do not go up in a straight line, as they have done for the past 10 years since 2009. There may be years of negative growth or little growth.

4. Inflation. Most retirees underestimate the impact of inflation on their income needs. If you need $80,000 per year to meet your needs today, that could mean about $100,000 11 years from now and $120,000 in 20 years from now if we have 2% inflation. Are your investments designed with an inflation buffer?

5. Retirement income must be sustainable, predictable, tax-efficient, flexible and perpetual. You need to have a strong degree of confidence that it will be there each year for the rest of your life and your surviving spouse's life. You are planning for the next 30+ years so take the time to do it right.

At Langford Financial Inc., we specialize in fee-only planning for those transitioning into retirement. Our plans start at $600. You can learn more about our pricing and process by clicking here.

Calgary's Fee-only Retirement Income Planners,

Willis J Langford BA, MA, CFP

Nancy R Langford CRS

587-755-0159

Langford Financial Inc. is an independent financial planning and investment practice specializing in fee-only retirement income planning for the nearly and newly retired. Nancy holds a Certificate in Retirement Strategy and Willis is a Certified Financial Planner® 


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