Steffen, 60, and his wife Jennie, 57, have a household income of about $72,000 a year, none of which is taxable. Jennie earns about $2,000 a year doing part-time work.Amir Salehi/The Globe and Mail
Steffen had been enjoying a professional lifestyle when a life-changing event left him with a permanent disability. Thankfully, he had long-term disability insurance to replace some of his income with monthly payments through to age 65.
Since then he and his wife, Jennie, have been living mainly on Steffen’s disability insurance and Canada Pension Plan disability benefits. Their household income is about $72,000 a year, none of which is taxable. Jennie earns about $2,000 a year doing part-time work.
Steffen is 60 years old and Jennie is 57. They have a mortgage-free house and about $727,500 in savings. They hope to build their savings to about $1-million.
Their challenge, as Steffen sees it, is to make the most of what they have saved and invested and to keep their taxable income low enough so that they can qualify for the federal guaranteed income supplement (GIS).
Their questions: Steffen still has about $56,000 left in his registered retirement savings plan (RRSP). Should he continue to draw it down before age 65 or hang on to it as long as he can? How can they keep their income low enough to qualify for the GIS after 65? How can they find a financial adviser “of high integrity and competence” who is familiar with the concerns of people with modest income?
We asked Jason Heath, an advice-only financial planner at Objective Financial Partners Inc. of Markham, Ont., to look at Steffen and Jennie’s situation.
What the Expert Says
Steffen and Jennie have identified their retirement income target as at least $70,000 a year, Mr. Heath says. This appears to be in line with their current incomes, which are effectively tax-free.
“However, this budget seems to include their tax-free savings account contributions of $14,000 per year, implying their actual spending on living expenses is more like $56,000 per year right now,” he says.
“I think their sustainable spending could be closer to $75,000, indexed to inflation, using conservative assumptions,” the planner says. This assumes 2-per-cent annual inflation, 4.5-per-cent investment returns from their mutual fund portfolio, no home downsize or borrowing against home equity, no inheritances, and a life expectancy of 95 for both of them.
Steffen and Jennie are hoping to move to a different town and a less expensive property, so this could provide funds to increase their spending capacity and possibly reduce their home expenses, Mr. Heath says. They would also like to budget for a winter getaway to warm and sunny places for between two weeks and two months for as many winters as possible. They will need to replace their car eventually but have a modest budget for a used vehicle.
“I think their goals are very attainable, with the potential to increase travel spending, but Steffen’s health is a factor to consider,” Mr. Heath says. “If his health deteriorates, health-care costs could increase.”
All retirees have that risk of expensive long-term care costs degrading their retirement assets, the planner notes. “But rather than hunker down and avoid discretionary spending on something like travel, there is also the risk of delaying travel and missing a window when you are young and healthy enough to enjoy it,” the planner says. “Retirees and their financial advisers alike should beware of this risk. Prioritizing tomorrow over today may be prudent financially but can have significant lifestyle risks.”
Steffen anticipates qualifying for the Guaranteed Income Supplement (GIS) at age 65, Mr. Heath says. “This is certainly possible given their income and asset makeup.” GIS is a monthly benefit payable to Old Age Security (OAS) recipients with low incomes. It is reduced as income rises. By Steffen’s age 65, their combined income would need to be less than about $57,000 based on the projected GIS thresholds at that time. Once Jennie is also receiving OAS, the combined income threshold will decrease by nearly 50 per cent. “Deferring Jennie’s OAS as well as her CPP until age 70 may therefore be a strategy to consider.”
One challenge Steffen will have relates to his CPP disability benefit at age 65. It will automatically convert to a retirement benefit at that time. Someone trying to maximize GIS might otherwise defer their CPP to as late as age 70 as CPP income would reduce the amount of GIS they receive.
They have a sizable non-registered account that will generate taxable interest and dividends as well as potential capital gains, the planner notes. “If they tilt their portfolio towards lower-yielding securities that expect more deferred capital gains than current year income, this may help maximize their GIS benefits,” he says. “They could also get creative and consider RRSP contributions using their available RRSP room to strategically lower their taxable income to maximize GIS in years with fluctuations in income owing to realizing capital gains.
Steffen is drawing down his RRSP each year in part to try to maximize GIS benefits in the future. “I like the approach more from the perspective that his taxable income is relatively low as it is, plus he has a disability tax credit that reduces his tax payable, so he can whittle away at his RRSP with little to no tax,” Mr. Heath says.
Steffen mentions that he has a few chronic conditions that undermine his mental functioning. “We all have declining cognitive abilities as we age, particularly related to our finances,” the planner says. This makes Steffen’s goal of finding an adviser with high integrity and capability particularly important, especially if Jennie is less involved in their finances.
One of Steffen’s goals for his adviser search is to find someone well-versed with GIS and government benefits. “It may be difficult to find someone knowledgeable given advisers tend to work with higher-income clients,” the planner says. “He should probably search for a certified financial planner as a starting point.”
Steffen may want to consider someone who is a discretionary portfolio manager who works with clients with assets in the $500,000 to $1,000,000 range, given that is the projected value of Steffen and Jennie’s retirement portfolio. “This increases the odds of finding someone whose interests align with theirs and reduces Steffen’s and Jennie’s required involvement in day-to-day investment decisions.”
Steffen has expressed concern about Jennie’s finances if he dies before her. Some of the risk of Steffen dying at a young age is mitigated by the low CPP retirement benefit Jennie is entitled to receive, Mr. Heath says. “She would receive a decent survivor benefit upon Steffen’s death given her own CPP is relatively low.” The maximum combined retirement and survivor benefit cannot exceed the maximum retirement benefit. So, a long-time CPP contributor may receive little to no survivor benefit following their spouse’s death.
Steffen has a $200,000 life insurance policy with premiums of about $2,600 a year. If his life expectancy is likely to be compromised owing to his health issues, it may be best to plan to keep his life insurance long-term, the planner says. This may involve converting the policy to a whole life policy at some point if possible.
Client Situation
The People: Steffen, 60, and Jennie, 57.
The Problem: How can they arrange their affairs to qualify for as much of the federal guaranteed income supplement as possible? Should Steffen draw down his remaining RRSP before he reaches 65?
The Plan: Steffen draws down his RRSP over the next few years before he is 65. They consider postponing OAS benefits to age 70.
The Payoff: Arranging their financial affairs to keep taxes to a minimum while qualifying for maximum government benefits.
Monthly net income: $4,670.
Assets: Cash in bank $6,000; non-registered mutual funds $400,500; his TFSA $129,000; her TFSA $136,000; his RRSP $56,000; residence $820,000. Total assets: $1,547,500.
Monthly outlays: Property tax $430; water, sewer, garbage $125; home insurance $155; heating, electricity $225; garden $75; transportation $220; grocery store $900; clothing $100; gifts, travel $260; charity $75; irregular expenses home and car, medical $1,250; dining out $100; entertainment $30; subscriptions $5; prescriptions $150; vitamins $75; life insurance $250; disability insurance $20; phones, TV, internet $160; TFSAs $1,165; repaying home buyer’s loan $140. Total: $5,905.
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