A Registered Retirement Savings Plan (RRSP) can spend three decades growing quietly and still become surprisingly expensive at the finish line.
The problem usually isn’t that retirees suddenly become reckless. It’s that a strategy designed entirely around accumulating money continues operating after the job has changed. Retirement introduces taxable withdrawals, mandatory payments, inflation, and the possibility of selling investments during a market decline.
After 30 years of saving, “withdraw whatever the bank suggests” deserves more competition.
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RRSP vs retirement deadline
A RRSP must mature by December 31 of the year its owner turns 71. The money can be withdrawn, used to purchase an annuity, or transferred into a Registered Retirement Income Fund (RRIF).
Cashing out the entire account would generally make the withdrawal taxable that year. Transferring it directly to an RRIF usually keeps the investments tax-deferred, although withdrawals become taxable income when received.
Mandatory RRIF payments begin in the year after the account is established. Retirees can withdraw more than the minimum, but not less. That creates a tax problem when RRIF income lands on top of Canada Pension Plan (CPP) benefits, Old Age Security (OAS), workplace pensions, and other taxable income.
Use lower-income
Someone who retires at 62 but delays CPP and OAS may have several relatively low-income years. Taking modest RRSP withdrawals during that period could reduce the balance that eventually becomes subject to mandatory RRIF payments.
That doesn’t mean draining the account immediately. The goal is smoothing taxable income across retirement rather than celebrating wonderfully low taxes at 65 and discovering an expensive RRIF problem at 72.
A retiree should coordinate withdrawals with a qualified tax professional, particularly when income-tested benefits, pension splitting, or a spouse’s accounts are involved.
Keep the portfolio working
Converting an RRSP into an RRIF doesn’t require selling every stock and moving the proceeds into cash. A retirement portfolio may need to fund spending for another 20 or 30 years.
I’d consider holding one or two years of planned withdrawals in cash and short-term guaranteed investment certificates. High-quality bonds could cover additional near-term spending, while diversified stocks pursue the growth required later. One company I’d consider for that equity layer is Loblaw Companies (TSX: L).
L
Loblaw stock operates grocery stores, pharmacies, healthcare services, and e-commerce platforms across Canada. People may postpone buying a new couch during a downturn. Dinner and prescription refills are considerably less negotiable.
Second-quarter retail revenue increased 4.1% year over year to $15.1 billion. Adjusted earnings per share climbed 11.9% to $0.66, while retail free cash flow reached $856 million.
Near $62.55, Loblaw stock trades at approximately 26.5 times trailing earnings. That’s a premium valuation for a grocery and pharmacy operator, making gradual purchases more sensible than treating defensive as another word for cheap.
Loblaw stock also faces regulatory scrutiny, intense competition, rising labour expenses, and cautious consumers trading down to lower-margin products. Essential businesses can still produce disappointing investments when purchased without respect for price.
Foolish takeaway
Monthly retirement payments should come from the cash reserve rather than whichever stock performed worst that week. After a strong market year, retirees can rebalance gains and refill that reserve. During a decline, cash and maturing fixed-income investments can cover spending while stocks receive time to recover.
An RRSP shouldn’t become a chequing account simply because its owner retires. It needs a new job description. Strategic withdrawals can help manage taxable income. Cash and bonds can protect near-term spending, while a defensive growth stock such as Loblaw stock can support expenses arriving much later.
