Mandy and Syed have two adult children, a mortgage-free house in Toronto and $1.8-million in investments.Melissa Tait/The Globe and Mail
Syed is 65 years old and Mandy is 64.
He has been self-employed for a few years, making $10,000 a year as a part-time trainer, while she earns $126,000 a year as a business manager. As well, Mandy has a defined benefit pension that will pay her $12,000 a year at 65.
They have two adult children, one still living at home, a mortgage-free house in Toronto and $1.8-million in investments. Their main question is whether they are well-positioned for Mandy to retire next year. Syed would continue with his part-time work for another two or three years.
They wonder what drawdown strategies they should employ for their registered retirement savings plans and locked-in retirement accounts. Their target retirement spending is $75,000 a year after tax, rising in line with inflation.
We asked Corrinna Paxton, a certified financial planner at Objective Financial Partners in Kelowna, B.C., to look at Syed and Mandy’s situation.
What the expert says
“Syed and Mandy have done many things right,” Ms. Paxton says. Their balance sheet is impressive: $3.1-million in net worth, no debt, substantial registered savings, healthy tax-free savings account balances and a mortgage-free home. “More importantly, their retirement spending goal of $75,000 a year after tax is modest relative to their assets.”
They wonder if Mandy is positioned to retire in 2027.
“Based on the information provided, I believe the answer is yes,” the planner says.
Assuming a conservative 4 per cent rate of return over a 30-year time frame, their portfolio could reasonably support about $75,000 annually after tax, Ms. Paxton says.
“Once Canada Pension Plan, Old Age Security and Mandy’s defined benefit pension are added, their retirement income should comfortably exceed the target, even after accounting for taxes,” she says. If Mandy continues to work, it becomes more of a personal choice than a financial requirement.
Should Renata, 75, downsize and pay off her reverse mortgage to leave money for her sons?
Their home also provides flexibility should health care or long-term care become a consideration later in life.
“Before Mandy gives notice, I would recommend preparing a detailed retirement cash flow projection that stress-tests their plan using poor investment returns early in retirement, higher inflation, and different longevity assumptions,” the planner says. “Retirement planning is about confidence under adverse scenarios, not just average ones.”
As retirement approaches, their investment strategy should shift from maximizing returns to creating reliable income. “I’d review whether their asset allocation is appropriate for someone beginning withdrawals and ensure they have sufficient cash or short-term fixed income to avoid selling equities during a market downturn,” Ms. Paxton says. As well, investment risk tolerance sometimes changes when people go from saving to spending.
Next, the drawdown strategy. “This is where careful planning can add significant value.”
Both Syed and Mandy plan to delay taking CPP and OAS payments until age 70. “I support this strategy, assuming their health remains good,” the planner says. Delaying these benefits creates larger guaranteed, inflation-indexed lifetime income and provides peace of mind for retirees withdrawing from their investments in their 70s and 80s.
The years between retirement and age 70 create an excellent tax-planning opportunity for their registered accounts.
“Instead of waiting until age 71 to convert their RRSPs and LIRAs, I recommend converting at least a portion into registered retirement income funds or life income funds,” she says. This allows them to begin drawing registered assets while their taxable income is relatively low. They might try to plan to convert enough of their registered assets so the minimum withdrawal is in line with their cash flow needs.
Of note is that they may be able to unlock a portion of their LIRAs and transfer a portion to their RRSP/RRIF accounts for more flexibility in future withdrawals. The unlocking rules vary depending on the province where the pension plan was registered.
Now single, can Randy, 61, afford to help his niece and nephew financially?
The objective of early registered account withdrawals is to fill up their lower tax brackets each year rather than allowing their RRSPs and LIRAs to continue growing until mandatory withdrawals begin at age 72. This approach reduces future required minimum withdrawals and lowers the likelihood of paying higher marginal tax rates or triggering OAS recovery tax later in retirement.
Because Mandy has substantially more registered assets than Syed, it also makes sense to evaluate whether somewhat larger withdrawals should come from her accounts during the early retirement years, Ms. Paxton says. This can help equalize future taxable income between spouses.
“I would preserve their TFSAs for as long as possible. They provide tax-free flexibility for unexpected expenses, health care costs or years when additional cash is required without increasing taxable income.”
Syed and Mandy have done the hard part – they’ve accumulated the assets. The next phase is turning those savings into reliable, tax-efficient income. “In my experience, retirement success isn’t only determined by the size of your portfolio but how thoughtfully you draw from it,” the planner says.
Depending on how their investment and retirement accounts are invested, their greatest financial risk is unlikely to be running out of money. Instead, it is paying more tax than necessary over a retirement that could last 30 years or more.
With thoughtful sequencing of RRIF and Life Income Fund withdrawals, delayed government pensions and ongoing annual tax planning, they are well-positioned to achieve their retirement goals while maximizing after-tax income throughout retirement.
“My recommendations would be: 1) Complete a detailed cash-flow analysis. Would they spend more now and less later? Some people travel in the initial years of retirement and stay closer to home in their later years. Stress-test the income need in different markets, inflationary environments and longevity scenarios.”
2) Develop a tax-efficient RRSP/RRIF withdrawal strategy between retirement and age 70 and work closely with a tax adviser to smooth future tax brackets.
3) Review survivor income and long-term care costs to ensure the plan works for either spouse well into their 90s.
How should Faye, 68, and Ava, 60, draw down their RRSPs given their $108,000 spending target?
Client situation
(Income, expenses, assets and liabilities provided by applicants)
The people: Syed, 65, and Mandy, 64.
The problem: Are they positioned financially for Mandy to retire next year when she turns 65?
The plan: Draw up a cash-flow plan, defer government benefits, develop a tax-efficient drawdown strategy and review their investments to ensure they are suitable for their changed circumstances in retirement. Stress-test different scenarios.
The payoff: An understanding of how planning is an ongoing process that changes over time.
Monthly after-tax income: $11,700.
Assets: Cash $19,800; his non-registered portfolio $237,000; his TFSA $145,000; her TFSA $108,000; his RRSP/LIRA $476,000; her RRSP/LIRA $856,000; residence $1,300,000. Total: $3.1-million.
Estimated present value of her defined benefit pension: $156,220. This is what someone with no pension would have to save to generate the same retirement income.
Monthly outlays: Property tax $545; water, sewer, garbage $180; home insurance $80; electricity $135; heating $115; maintenance $205; garden $75; transportation $655; groceries $1,025; clothing $135; housewares $220; professional fees $80; gifts, charity $140; vacation, travel $500; other $10; dining, drinks, entertainment $910; personal care $110; club membership $5; sports, hobbies $120; subscriptions $40; doctors, dentists $280; drugstore $130; health, dental insurance $150; life insurance $115; disability insurance $255; communications $165; TFSAs $1,165; her pension plan contributions $800. Total: $8,345. Surplus goes to unallocated spending.
Liabilities: None.
Want a free financial facelift? E-mail finfacelift@pm.me.
Some details may be changed to protect the privacy of the people profiled.
