Tucker, 67, is drawing in $100,000 a year, and his wife, Jeanie, earns about $40,000 working in real estate sales.Sammy Kogan/The Globe and Mail
Tucker is 67 years old, semi-retired, and drawing $100,000 a year in dividends from a successful small business that he is gradually winding down.
His wife, Jeanie, is 55 and works in real estate sales, earning about $40,000 a year. She has been in Canada about 12 years.
Tucker has two children in their early 30s from a previous marriage, a house in Toronto valued at $1.8-million, and substantial savings and investments.
He is seeking advice on how to use his company assets, in combination with his RRSP, to fund his retirement. He also wants to know if he can split pension income with his wife. In addition to his dividends, Tucker gets a monthly life income fund withdrawal of $970 and another $557 a month from an indexed, defined benefit pension from a previous job.
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“Should I withdraw money more rapidly from my company to reinvest in my tax-free savings account, where I have $60,000 of unused room?” Tucker asks in an e-mail.
Their spending goal is $100,000 a year after tax, which includes $30,000 a year for travel.
We asked Sean Wilson, a certified financial planner at Moraine Wealth Advisory in Calgary, to look at Tucker and Jeanie’s situation.
What the expert says
“Tucker married a second time roughly eight years ago and wants to fund his and Jeanie’s lifestyle, including travel, from his pensions and corporate assets,” Mr. Wilson says. Jeanie, who keeps her finances separate, plans to work till she’s 75, while investing as much as possible.
Tucker started taking Old Age Security benefits at 65 and, in April, started drawing Canada Pension Plan benefits as well, the planner says. Jeanie is assumed to start OAS at 70.
In preparing his forecast, Mr. Wilson assumes long-term portfolio returns of 6.15 per cent, an inflation rate of 2.1 per cent, real estate inflation of 3.1 per cent and maintenance, insurance and property taxes of 1.5 per cent of the $1.8-million house value. Their $30,000-a-year travel budget ceases when Tucker is 85, and they both presumably live to be 95.
Tucker will receive dividends from his corporation for 10-plus years, a small defined benefit pension from a previous job, CPP, OAS – some of which is clawed back – LIF income and, starting in 2027, registered retirement income fund, or RRIF, withdrawals.
Their investment assets are as follows: Tucker’s LIF $70,000; his RRSP $965,000; his TFSA $135,000; his corporate investments $487,000; Jeanie’s TFSA $170,000; their non-registered investment account $30,000; and $20,000 in each of their personal bank accounts. Tucker has a whole life insurance policy with a death benefit of about $50,000.
“Tucker does not want Jeanie to use her funds to cover living expenses,” Mr. Wilson says. Tucker wants her to save and invest as much of her income as she can, allowing her to build up her investments to fund her later years. Because Tucker pays all the bills, he has to draw more money from taxable sources, pushing him into a higher tax bracket.
Tucker wants to leave the majority of his assets to his two adult children. He intends to leave them his RRSP/RRIF, LIF and two-thirds of the value of his house, which is in his name alone. He plans to leave one-third of the home’s value to his wife, who would also be the successor annuitant on Tucker’s TFSA.
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However, over time, because his RRSP/RRIF and his corporation are funding much of their retirement, Tucker’s TFSA could end up much larger than the RRIF.
Tucker and Jeanie are in the process of getting their wills prepared, the planner notes. “It would be worthwhile to discuss this with an estate-planning specialist,” Mr. Wilson says. “There is some additional complexity that comes into play when you have adult children from another relationship.”
While Tucker would like to leave his RRSP and LIF to his daughters, he is also drawing down those assets to support his and Jeanie’s lifestyle. “There may be a tipping point at which Tucker wants to consider having Jeanie be the beneficiary of the RRIF and his daughters the beneficiaries of the TFSA.” This would be more tax-efficient, he says.
Given Tucker’s children are the beneficiaries of his RRIF, his estate would still have to pay taxes because there would be a deemed disposition – a sale – of the RRIF on the date of death, the planner says. A spousal rollover, in contrast, would allow Jeanie to be the beneficiary of the RRIF without triggering taxes.
One consideration, assuming Tucker is insurable, is that Jeanie may want to fund some form of universal life insurance policy of which she is the beneficiary, the planner says.
“They need to work with someone to properly map out what will happen on his death because there are plenty of ways this could get messy.”
Tucker has been taking $100,000 in dividends each year from his corporate account. “We have reduced that to $66,000 in 2026, and to $48,000 in 2027, indexed to inflation, until the corporation is wound up, estimated to be in 2038.”
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The reduced dividend income is offset by minimum RRIF withdrawals beginning in 2027. Tucker’s combined RRIF income and CPP are projected to come to $66,000 in 2027.
“This combination allows Tucker to make $15,000 contributions [annually] over the next eight years to eventually get his TFSA fully maxed out, while at the same time limiting his OAS claw-back to just over $2,000 in 2026 and fully eliminating it by 2029.”
Tucker will be able to split his RRIF withdrawals with Jeanie, “which will result in just under $25,000 being taxed in Jeanie’s hands in 2027.”
Mr. Wilson stress-tested his forecast “to make sure it can hold up to the unpredictability of returns,” he says.
“We ran Monte Carlo simulations first. Rather than assuming a straight-line return, the software runs a plan through 1,000 market scenarios, each with its own sequence of ups and downs,” the planner says. “That gives us a probability of success across a range of possible futures, rather than a false sense of precision.”
He also evaluated how well his plan would hold up to a 40-per-cent market correction in 2028 that takes six years to recover, investment returns that end up 1.5 percentage points below assumptions, and inflation that runs 25 basis points higher. “In all situations, the plan held up, sustaining lifestyle spending.”
Currently, Tucker is doing all of the investing for both of them. The portfolio is 98 per cent equities with 54 per cent exposure to U.S. equities and 38 per cent to Canadian equities. “While Tucker has had strong returns, he is highly concentrated in equities and North America,” Mr. Wilson says. “It would be reasonable to allocate some of their portfolio to international and emerging markets while also incorporating some fixed income.”
It would also be prudent to consider what will happen if and when Tucker is not able to manage the portfolio. “Does Jeanie want to manage her own portfolio, or would she prefer to have someone help her with it? Some thought should be given to how this might play out.”
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Client situation
(Income, expenses, assets and liabilities provided by applicants.)
The People: Tucker, 67, Jeanie, 55, and Tucker’s children, 32 and 34.
The Problem: How best to draw down Tucker’s assets to fund their retirement. Can he split some of his income with Jeanie?
The Plan: Tucker’s income will go up next year when he converts his RRSP to a RRIF and starts withdrawing, so he can reduce the amount he takes in dividends. Consider moving to a more balanced and diversified portfolio. Consult an estate-planning specialist to help draw up their wills.
The Payoff: Better insight into how to arrange their financial affairs.
Assets: Tucker’s LIF $70,000; his RRSP $965,000; his TFSA $135,000; residence $1,800,000; his corporate investments $487,000; Jeanie’s TFSA $170,000; non-registered investment account $30,000; his personal bank account $20,000; her personal bank account $20,000; whole life insurance policy $50,000. Total: $3.75-million.
Monthly outlays: Property tax $750; water, sewer, garbage $75; home insurance $180; electricity $125; heating $140; maintenance $175; financial planner’s addition for higher maintenance and repair $440; garden $50; transportation $295; grocery store $880; clothing $75; gifts, charity $400; vacation, travel $2,500; dining, drinks, entertainment $1,010; personal care $45; club membership $10; golf $250; sports, hobbies $200; subscriptions $150; health care $100; TV $75. Total $7,925.
Liabilities: None.
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Some details may be changed to protect the privacy of the people profiled.
