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(Fred Lum/The Globe and Mail)
(Fred Lum/The Globe and Mail)

FINANCIAL FACELIFT

Former executive pictures a comfortable, low-risk retirement Add to ...

Veronique, who will turn 65 this year, has had a rewarding career. A highlight was the “fabulous” stint at a multinational company where she travelled the world and rose to a senior executive position. Now she runs her own consulting firm.

Veronique has lately been thinking about retiring – as soon as January. There are many hobbies to enjoy and interests to pursue, not to mention travelling several times a year.

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Her spouse, Peter, is turning 72 this year and still works. He makes about $150,000 a year and loves what he does. He intends to retire “later.”

When she retires, she doesn’t want Peter to bear any costs beyond what he is paying now. This means that she will continue paying half of a number of household expenses while Peter continues to pay more than half on the rest. On this basis, her retirement will need a minimum of $40,000 in after-tax annual income.

If Veronique retires in January, she will receive $16,500 a year from the Canada Pension Plan (CPP) and Old Age Security (OAS). She’ll also be able to withdraw from $631,500, comprising cash and financial assets that are invested very conservatively (as is her preference) within mostly registered accounts.

Her concern: “I’d like to know if I can afford it. I don’t want to run out of money and have to reduce my lifestyle.” She has no children; Peter has two adult children.

We asked Ryan Kerr, a fee-for-service financial planner at Astrolabe Financial Group Inc. in Ottawa to take a look.

What the expert says

“In order to ensure retirement income of $40,000 after tax, Veronique would need a total taxable income of approximately $48,500 a year,” begins Mr. Kerr. “With $16,500 of OAS and CPP, she would require portfolio income of $32,000 a year.”

Without depleting her financial assets, she would need to earn about 7.5 per cent, assuming inflation averaged 2.5 per cent. “This exceeds her current risk tolerance substantially.”

If assets are allowed to deplete by 90, Veronique “would require an average return of approximately 4.5 per cent over the next 25 years assuming 2.5-per-cent inflation.” This target rate of return is not unreasonable for her current risk tolerance, provided “she is not paying high fees for her investments.”

Current investment fees should thus be assessed, and made sure they are no more than 1 per cent of assets. She might also get more “bang for the buck” by keeping her blue-chip stocks in her tax-free saving account because, in addition to paying no taxes on any withdrawals, stocks have the highest expected returns. Unspent retirement income can also be dumped into the TFSA.

“Veronique has indicated she has the flexibility to continue working full or part-time,” continues Mr. Kerr. She could exercise this option to add to her savings, reduce withdrawals from her registered retirement savings plan and delay retirement to take CPP/OAS when monthly payments are higher. This will “allow her to assume less risk with her financial assets without jeopardizing her comfort in retirement.”

“Veronique’s greatest opportunity to reduce taxes comes in collaboration with Peter,” Mr. Kerr says. He is required to convert his RRSP to a registered retirement income fund this year and begin taking minimum mandatory withdrawals every year.

Peter, whose RRSP is worth more than $1-million, can elect to use his wife’s age of 65, rather than his own, for determining the withdrawals in the first year. This would lower the rate of withdrawal from 7.48 per cent to 4 per cent.

Peter can also split pension income (including RRIF income) with Veronique. She could claim up to 50 per cent of the income from his RRIF this year, “allowing the income to be taxed at her lower marginal rate.” The tax savings could be used to reduce the couple’s shared expenses.

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Client situation

The person

Veronique, 64

The problem

Veronique wants to retire soon, but needs to make sure she can do it without having to reduce her preferred living standard or impose an additional burden on her spouse.

The plan

She can look at reducing investment fees and working a bit longer or part time. She can also collaborate with Peter to lower taxes on his RRIF income (by using her withdrawal rate and splitting income).

The payoff

Enjoying the retirement she seeks, without increasing the risk level on her financial assets or burdening her spouse.

Monthly net income

$5,750

Assets

Bank accounts: $8,000; GICs: $38,000; TFSA: $30,500; RRSP: $235,500; LIRA: $319,500. Total: $631,500

Monthly disbursements

Car lease $540; insurance $180; fuel $150; maintenance $60; parking/transit $20; groceries $600; clothing $150; gifts $100; donations $250; vacations/travel $500; alcohol/tobacco $60; club memberships $70; dining out $100; entertainment $75; pet expenses $100; sports/hobbies $350; subscriptions $25; medical/dental care $50; prescriptions $50; vitamins $25; health/dental insurance $185; condo fees/taxes $750; hydro $125; telephone $69; cellphone $70; RRSP contributions $916; TFSA $415; Total: $5,985. Shortfall: $235

Liabilities

None

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Read more from Financial Facelift.

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Some details may be changed to protect the privacy of the persons profiled.

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