Faye and Ava's retirement spending goal is $108,000 a year after tax, rising with inflation.Sammy Kogan/The Globe and Mail
Faye is 68 years old and her spouse Ava is 60.
Faye retired in 2012, and is now bringing in about $36,000 a year from a part-time gig. With her government benefits and small municipal pension, she’s grossing about $56,000 a year.
Ava is receiving long-term disability benefits totalling $53,000 a year that cease when she turns 65. She has a work pension that will pay $26,000 a year at 65.
“Together we have funds in RRSPs, tax-free savings accounts and non-registered investments,” Faye writes in an e-mail. They also have a mortgage-free house in small-town southern Ontario, with a rental suite that generates $24,000 a year.
“We are looking for expert advice on how to turn our savings into a sustainable, tax-efficient retirement income that will support us for the rest of our lives,” Faye writes.
“We want to understand the right RRSP meltdown strategy for us, how to co-ordinate it with Canada Pension Plan, Old Age Security, work pensions and rental income, and how to avoid paying more tax than necessary while ensuring we don’t outlive our money.”
Their retirement spending goal is $108,000 a year after tax, rising with inflation.
We asked Ian Calvert, head of wealth planning at HighView Financial Group in Toronto, to look at the couple’s situation.
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What the expert says
Faye and Ava have a net worth of more than $5-million, of which $1.8-million is their house, Mr. Calvert says.
“They have a great net worth and have accumulated substantial amounts of investable assets, but they lack a withdrawal plan that focuses on taxes and the longevity of their assets.”
Faye thinks her part-time job will come to an end this year, so they will have a meaningful after-tax shortfall.
“Faye should undoubtedly look to her $1,250,000 RRSP first to solve this problem,” Mr. Calvert says. “It’s a great accomplishment to see an RRSP of more than $1-million, but this also comes with a tremendous amount of deferred taxes.”
Faye should convert the entire RRSP to a registered retirement income fund and start to take the minimum annual withdrawals, the planner says. The minimum withdrawal in 2027 is estimated to be about $58,000.
Starting in 2027, their cash-flow plan breaks down as follows: $58,000 from Faye’s RRIF, $5,000 from her pension, $6,700 in OAS and $8,600 in CPP. That, plus their $24,000 of net rental income and Ava’s combined disability payments of $53,000 will give them a total family income of $155,300 a year. Subtracting income taxes of $37,350 leaves them with an after-tax income of $117,950 a year, surpassing their spending target.
They should transfer $7,000 each from their non-registered savings to their TFSAs in January each year, he says.
Because the withdrawal of $58,000 from Faye’s RRIF will be considered eligible pension income, they can elect to split up to 50 per cent of this amount. After income-splitting and considering the investment income they will have to report from their non-registered savings, they can expect their taxable income to be about $93,000 a year each. “This is a favourable income from a tax perspective and puts them both at the top of the 29.65-per-cent combined marginal tax rate.”
This would be the optimal strategy until 2032, when Ava turns 65, the planner says. At that time, her disability income will end, and her CPP disability will convert to the CPP retirement benefit.
Ava should convert her RRSP to a RRIF and start annual withdrawals. Given that the RRSP is $120,000 today, she should take $20,000 a year – more than the annual minimum. This $20,000 and her pension of $26,000 will mostly offset the loss of her disability payments. At this rate of withdrawal, her RRIF is expected to be depleted by 2041, when she is 74.
Faye can continue to withdraw the annual minimum, which is expected to be about $70,000 by 2032.
“Their plan is extremely healthy as most of their income can be funded by RRIF withdrawals, government benefits, pensions and their rental income,” Mr. Calvert says.
“This allows them to continue funding their TFSAs, and their non-registered funds will not be needed as a main source of income.” The non-registered portfolio, along with their real estate, should leave a substantial buffer for increased longer-term health care costs, if needed.
If the non-registered investments can earn 4 per cent a year, assuming they’re made up of equities, guaranteed investment certificates and cash, the expected value of the portfolio when Faye is 90 will be about $3,200,000, the planner says.
“They could comfortably increase their annual spending by $50,000 a year, taking only the yield or expected income from the non-registered portfolio,” he says.
Ava and Faye wonder what would happen if their rental income was removed, the planner notes. It would be a loss of cash flow, but also $24,000 less of taxable income to report. In this scenario, they could increase the taxable withdrawals from Faye’s RRIF.
If Faye’s RRIF earns an average of 5 per cent a year, the expected balance at the age of 90 is still $775,000, so there is certainly the capacity to increase her annual income from this account.
“Tax efficiently reducing the RRIFs, building the TFSAs and preserving their non-registered account will provide the most flexibility and tax efficiency in the long run,” Mr. Calvert says.
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Their stocks and stock funds, real estate and government benefits will help them stay ahead of inflation over time. “Holding cash and GICs is a great option for short-term funds, but too large of an allocation over their retirement will erode their purchasing power,” he says.
“A globally diversified portfolio of equities should play an important role in their asset allocation,” the planner says. “Based on their current assets and spending target, they don’t need to be overly aggressive or risky in their portfolio decisions to achieve their goals.”
“Building a consistent and predictable income stream of dividends, interest and distributions will help them achieve their total return while managing risk,” he adds.
Client situation
(Income, expenses, assets and liabilities provided by applicants.)
The people: Faye, 68, and Ava, 60.
The problem: Finding the optimal draw-down of their savings and investments so they pay as little tax as possible, and have enough to last for the rest of their lives.
The plan: Tap Faye’s RRSP first and split the retirement income to keep them in a favourable tax bracket. When Ava’s disability income ends, she converts her RRSP to a RRIF and begins withdrawing to supplement her pension.
The payoff: Their spending goal met and surpassed with a sizeable buffer for future uncertainty.
Monthly after-tax income: $8,500.
Assets: Cash $26,000; GICs $426,000; non-registered stocks $41,000; joint non-registered cash equivalents $1,100,000; Faye’s TFSA $211,000; Ava’s TFSA $167,000; Faye’s RRSP $1,250,000; Ava’s RRSP $120,000; house $1,800,000. Total: $5,141,000.
Estimated present value of their defined benefit pensions: Faye’s $71,000 and Ava’s $335,000. This is what someone with no pension would have to save to generate the same retirement income.
Monthly outlays: Property tax (housing expense includes rental) $400; water, sewer, garbage $20; home insurance $300; electricity $300; heating $250; security $30; maintenance $650; garden $75; car insurance $315; fuel $150; maintenance, $500; parking $10; groceries $350; clothing $100; loan $170; gifts, charity $100; vacation, travel $500; dining, drinks, entertainment $700; personal care $75; pets $100; sports, hobbies $100; subscriptions $25; health care $150; communications $325; TFSAs $1,170. Total: $6,865. Surplus of $1,635 goes to emergency fund.
Liabilities: Interest-free loan $16,000.
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