# How to manage early retirement income



## diharv (Apr 19, 2011)

Hello all
I have been reading this forum for a couple of years now but have never posted. It has been very educational to say the least .
Some background on me . I am a health care professional 46 years old ,married with two kids 7 and 10. My practice is incorporated and I leave money I do not pay myself or my wife in the company invested in mostly GICs and some stocks and mutuals. My Inc. has a total of about $1.1 million in investments. My wife and I have taken about $90000.00 total in salary for quite a few years but this year I am changing it to give myself a mix of salary and dividends so as to max my CPP. We have been contributing to our RSPs to our individual maximum levels every year and they total $400000.00 so far. No TFSAs yet as all of our personal money has gone into a new house. We still own our old house and it is for sale. The new house is paid off as far as the bank goes but I will owe my corporation $144000.00 by Aug 2012 as I took out a shareholder loan to buy the house. 
I have been thinking that I would lke to work nine more years to age 55. I will keep adding to the RSPs and the corporation retained earnings until then.I don't know how much I'll have but for some workable numbers Ill say there will be 1.5 mil in the company and $500000.00 in the RSPs.My question is where do I take my income from in the years between 55 and when I can start taking max CPP? Do I start draining the RSPs at 55 until they are gone and then start taking dividends from the corporation or do I start taking dividends at age 55 and don't collapse the RSP until I have to at age 71?
I know alot hinges on how much I'll need and my kids' educational aspirations at that time but I am just looking for some general advice on what people do in situations like this.
I look forward to hearing some feedback and I will provide any additional info that is needed if any of you have some advice for me.
Thank you.
diharv


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## Four Pillars (Apr 5, 2009)

Lots of variables.

What kind of income are you looking at in retirement? 

You don't have to collapse the RRSP at age 71 - just convert it to a RRIF or annuity (or both). There will be no tax consequences of that transfer.


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## Cal (Jun 17, 2009)

Lots of variables...agreed.

As I was reading it, I was wondering if the OP would be selling his practice in 9 years, as this would affect the corp situation.

I was also wondering if he had discussed the possibility of an IPP with his accountant for his future retirement.

I think a good sit down with your accountant should clarify some of your situation for you.


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## diharv (Apr 19, 2011)

Hi
Thank you for the replies. I know there are alot of variables but I was just hoping for some general advice. My very rural location leaves me with no option to sell my practice. Meaning I am not counting on selling to fund my retirement. More likely option would be to walk away or give it away. I have discussed IPP with my accountant briefly and I do not know much about them but I came away with the idea that I would essentially be surrendering all control over my money to a third party that would be administering the plan and that is not something I am willing to entertain.
I am just looking at what would be a better option to bridge the gap to the age at which I would be able to collect max CPP from a point of view of paying the least tax. I have been reading the blog of Garth Turner and he keeps refering to RSP's as being tax bombs in the future butI am not clear as to why he says this.
And of course this all depends on how much income I'll need to take each year after age 55 between my wife and I.At this point I have no idea. My kids are small right now but I can see that each year more and more will be spent raising them but that is the way life goes!
thank you.
diharv


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## sprocket1200 (Aug 21, 2009)

OP really needs to talk to a tax accountant and a good financial planner. I can't see the value of having to take CPP. this will just help push you into a higher tax bracket all through year of receipt.


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## diharv (Apr 19, 2011)

sprocket1200 said:


> OP really needs to talk to a tax accountant and a good financial planner. I can't see the value of having to take CPP. this will just help push you into a higher tax bracket all through year of receipt.


Why would I not want to take CPP that I would be entitled to after paying into it for almost 30 years? I would only begin to take it at the age at the time that does do penalize you for taking it early.


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## steve41 (Apr 18, 2009)

Taking early/late CPP is a complex issue. It will generally boil down to an actuarial decision. If you make it out to a ripe old age, it would have been better if you had taken late (65 say) CPP. If you die prematurely, it would have been better (for your estate... not you of course) if you had taken early CPP.


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## Brian Weatherdon CFP (Jan 18, 2011)

Hi Diharv, interesting case. Rather much for a discussion in this type of forum. There are valuable strategies you may not find unless you are prepared to allow someone with advanced experience to counsel with you and advise you. Your chartered accounting firm is part of this; your insurance and investment advisor(s) would be part of it too, if they truly have the experience required to treat this fully (your CA can help you see the value in the other advisors).

- above has been mentioned an IPP in your corporation. Good, yet be aware of ongoing fees and requirements to keep IPP.

- Enhanced Retirement Plan, by any name, is an insured retirement concept allowing your corporation to own an insurance policy with tax-free growth, which you later leverage for high tax-free income (probably using other assets in earlier retirement, and the ERP in later years). More flexible than IPP, and no annual accounting fees.

- Annuities are also surprisingly effective despite what people consider to be a low interest rate environment. Term certain or life- payout annuities can be matched with term-to-100 (or minimum-paid-Universal Life insurance, or higher investment into UL or WL policies) to create a reliable income with low/no taxation .....with the annuity investment refunded to your family or corporation at your death. 

Goodness, the opportunities are virtually endless, and yet few advisors work in this area. Someone not far from you could probably help you. Ask your accounting firm to get an unbiased opinion on who serves respectfully in these kinds of advanced strategies.

_(Above is for discussion only, overly-simplified, and is general comment. Follow up with your professional advisors as they can listen to you and observe your situation in order to properly advise and guide you.)_


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## I'm Howard (Oct 13, 2010)

A word of caution, just about every person I know who at 30 planned to retire at 50, now they are 50 they are saying maybe 60 or 65

.http:www.financialwebring.com

Several well known authorities on retirement, including Bruce Cohen, maybe can add to the answers provided here.


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## HaroldCrump (Jun 10, 2009)

I'm Howard said:


> A word of caution, just about every person I know who at 30 planned to retire at 50, now they are 50 they are saying maybe 60 or 65


Why do you think that is the case?
Is it because they could not accumulate enough wealth to provide a steady source of income?

Or is it because they thought they'd be happy after quitting work, and then realized they won't be?

Or did they get too carried away with the lifestyle race and "keeping up with the Joneses" effect so much that they had to continue working to finance their upward social mobility?


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## marina628 (Dec 14, 2010)

My husband retired at 42 after 4 months of retirement he went back 1-2 days a week.He gained weight in his time off and was getting lazy so he seen it as healthier choice to work a bit.


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## Plugging Along (Jan 3, 2011)

The people I knew who wanted to retire at a young age, did have the ability to (at least 8 figure net worths) However, none of the did. For them is it was more of the idea that being able to retire meant having the financial security, and was just a part of an overall goal. They liked the idea of not needing to work, but they generally, liked other things about their work.

The most successful person I know, could have easily retired at 30, but has continued working and starting companies, or been CEO's of others. He does it not for the money for the challenge.


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## steve41 (Apr 18, 2009)

Plugging Along said:


> The people I knew who wanted to retire at a young age, did have the ability to (at least 8 figure net worths) However, none of the did. For them is it was more of the idea that being able to retire meant having the financial security, and was just a part of an overall goal. They liked the idea of not needing to work, but they generally, liked other things about their work.
> 
> The most successful person I know, could have easily retired at 30, but has continued working and starting companies, or been CEO's of others. He does it not for the money for the challenge.


Geez, if I had an 8 figure net worth, it would be a full time job just figuring out how to spend it. I would need to hire personal shoppers.


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## Plugging Along (Jan 3, 2011)

The person was last working towards a 9 figure, and I think he may be close, if he already hasn't done it.

The person has no problems spending either, but it's just a very different view in terms of work and money.


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## steve41 (Apr 18, 2009)

So, your 30 year old was just about to a 9 figure net worth. Rough calculation... at 3% return, this guy (if retired) would be spending (after tax) around $165K per year?

Nice work.


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## Plugging Along (Jan 3, 2011)

This person is older than 30 now. He first made it big when he was 30, sold his company in the high 8 digits (not all his, but a big chunk was). Had to work as a condition of the acquisition. Few years later, started another company sold it for almost 9 digits. He's now on his 5th, maybe 6th company (could be more, but that seems right). I know his goal at one point was to be a billionaire, but he wasn't sure if he would slow down before then. He's only in his very early 40's right now, so he has a lot of time on his hand. 

I know for a fact he spends well over $165K a year. His kids education is close to 1/2 of that already. He's done very well for himself, but he still is pretty down to earth. We were out, and there was a book he was interested in for $10. He didn't want to buy it because he didn't see the value if he didn't have time to read it. He came from pretty humble beginnings too.


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## steve41 (Apr 18, 2009)

Remind me again why we should be worrying about this guy.


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## Plugging Along (Jan 3, 2011)

I'm Howard said:


> A word of caution, just about every person I know who at 30 planned to retire at 50, now they are 50 they are saying maybe 60 or 65
> 
> .http:www.financialwebring.com
> 
> Several well known authorities on retirement, including Bruce Cohen, maybe can add to the answers provided here.





HaroldCrump said:


> Why do you think that is the case?
> Is it because they could not accumulate enough wealth to provide a steady source of income?
> 
> Or is it because they thought they'd be happy after quitting work, and then realized they won't be?
> ...





> Remind me again why we should be worrying about this guy. ?


No need to worry about this guy. I was responding to why some people even though they planned to retire early don't. In the cases that I know of (which is more than one), it was none of the reasons that Harold mentioned. 
The example I knew of always imagined he would stop after the big one. This wasn't the case, it was more the rush of seeing if they could go bigger, not due to materialism or anything, but this person is just really driven. Also, the people that were involved with him, I believe all of them continued on (just not as much as him). Everyone single one of them could have retired in their early 30's but not one of them did. 

I didn't quote it because I've been trying to minimize my quotes.


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## diharv (Apr 19, 2011)

Thank you all for the replies. Interesting takes on early retirement.I'm only considering it for age 55 but when I get there I may not be ready to hang em up and delay it further.I currently read a blog written by someone who aspires to retire at age 45 with complete financial independence. Hell , I'm 46 now and consider myself to have a considerable nestegg but I certainly do not feel financially ready to stop working now and raise my kids and fund their educational aspirations beyond highschool.I do work as little as possible now approx 170 days per year so I feel I have finally after 20 years achieved a good balance between work and free time. I do observe colleagues of mine who have been out of school longer than I slogging away 5 days a week taking off two weeks per year but they spend more than I do on their toys. Our life is simple and debt free and when I sell our other house then all will be good ( and I can pay back my corp the shareholder loan).
As for structuring my finances in retirement yes good advice will be needed and I do have a good accountant. Should I maybe read Moneygal's book?


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## sprocket1200 (Aug 21, 2009)

managing your current and future income will have the biggest impact. that is why i love gov't DB pensions. it leaves them with no choice but to pay high taxes! thank you!!!


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## steve41 (Apr 18, 2009)

I don't know what this proves, but it is perhaps an exercise that more mid-career, early retirement dreamers should embark on...

Our hero is 40, has amassed a $400,000 RRSP, earns $75K and has dreams of early retirement. Question, what lifestyle change will he have to make if he retired at 60 rather than 65? 55? 50? 45? 

Answer: If he works until 65 his lifestyle solves at $54,156, retiring at 60, reduces that to $49,485, at 55 it is $43,713, at 50 ... $37,099, at 45 ... $29,368.... still not even 1/2.

This takes tax (BC), OAS&CPP into account, 5% rate, 2% inflation, dying broke at 95.


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## sprocket1200 (Aug 21, 2009)

steve41 said:


> I don't know what this proves, but it is perhaps an exercise that more mid-career, early retirement dreamers should embark on...
> 
> Our hero is 40, has amassed a $400,000 RRSP, earns $75K and has dreams of early retirement. Question, what lifestyle change will he have to make if he retired at 60 rather than 65? 55? 50? 45?
> 
> ...


steve, are these gross or net of tax numbers. if gross, 'hero' might as well go at 50, if not sooner...


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## steve41 (Apr 18, 2009)

Sorry. Salaries are before tax, net incomes are after tax.


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## Mensa (Oct 19, 2010)

This may be of limited value, given OP's dislike of IPP, but why not look into an Retirement Compensation Arrangement? Here's a VERY upper level explanationhttp://www.gblinc.ca/products/rca.html
You can do further digging if it's of interest.

It's nice, because the corp. gets the full deduction on your compensation. Seems it could be a little tricky determining just what a "reasonable" compensation amount is and getting CRA to agree with that, but might be worth your time to look into.


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