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Planning Tax-Efficient Transitions from Employment

The number of seniors in Canada is projected to grow from 4.2 million to 9.8 million between 2005 and 2036, largely representing the boomer population. These, of course, are the people who are worried today about whether they can retire, given the serious financial crisis being experienced at the doorstep of this new stage of life.

To bring context to the planning process, it helps to understand some of the parameters recent history provides us with, based on a July 2007 report from Human Resources Development Canada:

• Median retirement age: The median age of retirement in Canada is 61.0; that is, 62.6 for men and 60.0 for women (2005). This is somewhat higher than in 1997, when the median retirement age hit a low of 60.6.
• Life expectancy: Life expectancy in Canada for both sexes ­combined surpassed 80 years for the first time-80.2 years. Life expectancy for men was 77.8 years and for women it was 82.6. However, differences in life expectancy have begun to narrow since that statistic was established in 2004 and gender composition is expected to become more even amongst seniors.
• Median retirement income planning period: This means that the average length of retirement for which income must be planned is 19 years.
• Seniors in the workplace: According to the Organisation for ­Economic Co-operation and Development (OECD) Thematic Review of Older Workers, 2005, older workers in Canada are faring well in the labour market. They have higher than average earnings and lower than average unemployment rates.
• Seniors and unemployment: The bad news, however is that ­individuals aged 55-64 who lose their jobs stay unemployed, on average, for nearly 50% longer than prime-age workers. Older workers in remote and/or one-industry communities are especially at risk in the event of layoff or firm closure.

So the economic reality for most boomers is a transition out the workforce, rather than an entry into retirement on a "cold turkey" basis. From a planning perspective this means that there will be many "layers" of income, particularly at the start of retirement. The goal is to receive them tax efficiently, identify those tax efficiencies, and reinvest them. Your retirement income buckets will therefore be comprised of:

1. Income from actively earned sources: employment or self-employment
2. Income from employer-funded superannuation (RPPs - ­Registered Pension Plans)
3. Income from private pension savings (RRSPs (Registered ­Retirement Savings Plans), RRIFs (Registered Retirement Income Plans) or other annuities that pay benefits periodically)
4. Retirement benefits from the CPP (Canada Pension Plan)
5. Retirement benefits from the OAS (Old Age Security)
6. Investment sources: hopefully all of the income sources mentioned above will be withdrawn to fund personal living needs well before you need to tap into any other investments. However, if you must, there is a most tax-efficient basis to do so; often without generating any taxable income at all.

Maximizing Active Income Sources

Remember that income from employment or self-employment may ­continue on a consulting or part-time basis for many years to come. You may find those sources will be taxed more advantageously now that you are in a lower tax bracket. In addition, until you are age-ineligible (72) a portion of that income can be and likely should be tax-sheltered with RRSP contributions. Most people will still bear marginal tax rates of between twenty and fifty cents on every dollar they earn. You just can't afford not to take that double digit return the RRSP generates in tax savings. And, there are some new options for tax-efficient savings that can really help prepare you for retirement, and in retirement to. Therefore tax savings generated by the RRSP contribution and deduction could be leveraged to help you save even more.