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(Glenn Lowson for The Globe and Mail)
(Glenn Lowson for The Globe and Mail)

Financial Facelift

Tiptoeing ... gingerly ... into retirement Add to ...

After years of running their own company, Cameron and Carol find their priorities are shifting. She is 65, he is 55.

A couple of years ago, Carol had a health scare. While she still does a bit of office work for the company, she and Cameron would like to spend more time together travelling throughout Europe in their camper, which they leave with friends there.

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Cameron is planning to work part-time consulting, retiring fully in five years. Fortunately, they have quite an array of income sources to draw from. Carol gets Canada Pension Plan and Old Age Security benefits as well as $10,000 a year in salary from their company. Cameron is drawing a salary of $60,000. When he retires, he will get CPP and OAS as well as a U.K. pension (at age 66) for a total of about $15,000 a year. They also have substantial savings.

Their question is one many Canadians share: How to spend their savings in the most tax-effective way. Their goal is to travel for six months of the year, returning home to Southwestern Ontario for the rest of the time.

“We need help to decide how we should draw down our various investments to minimize our taxes, not only now but after we have both retired,” Cameron writes in an e-mail. They want to increase their spending substantially – from about $72,000 to $90,000 – to give them the footloose lifestyle they long for.

We asked Warren Baldwin, regional vice-president of T.E. Wealth in Toronto, to look at Cameron and Carol’s situation.

What the expert says

If Carol and Cameron spend $90,000 a year, they will run out of savings by the time Cameron is 76, Mr. Baldwin calculates. That assumes an inflation rate of 2 per cent a year, a 5-per-cent average annual return on investments and that they do not sell their house to raise additional capital.

If they keep their spending pretty much the same as it is now – about $72,000 a year – they will be okay, the planner says. With inflation, that number will have risen to nearly $89,000 a year by the time Cameron is 65.

First off, Cameron should take money from his non-registered portfolio to repay the line of credit for the car.

To preserve as much of their savings as possible, the couple should attempt to balance their assets to better equalize their respective incomes and avoid the OAS clawback, Mr. Baldwin says. Because Carol’s income is quite low, “it may make sense to withdraw some of her RRSP assets to take advantage of her low marginal tax rate.”

Over the next five years, while Cameron is still working part-time, he should consider contributing to a spousal RRSP for Carol so she can withdraw the funds later on, again, taking advantage of her lower income-tax bracket. This would avoid “loading up” Cameron’s income level to the point where he might be subject to OAS clawback, the planner says. The spousal RRSP should be completely separate from Carol’s own RRSP.

“They should also try to mix in some amount of dividend payments out of their company that could be taxed at a reasonable tax rate and not push her income to the point where she faces OAS clawback,” Mr. Baldwin says. This will be a balancing act.

Since Carol does not have income that qualifies for the pension income tax credit, she might want to set up a registered retirement income fund this year of about $50,000 (from her RRSP) so the withdrawal for 2013 will be close to the $2,000 of income required for the credit, the planner says.

Carol must take care that she withdraws money from her personal RRSP rather than the new spousal one Cameron sets up because of the three-year rule that restricts the withdrawal from spousal RRSPs, Mr. Baldwin notes. Otherwise, the income will be taxed in Cameron’s hands. In order for Cameron to maximize spousal RRSP contributions, he needs to earn income for as long as possible.

When Carol converts her remaining RRSP assets to an RRIF at age 71, she may well decide to base the minimum withdrawal on Cameron’s age, making it lower, which is also advantageous. Mr. Baldwin suggests the couple consider a more detailed estate planning review that might include testamentary trusts in their wills to reduce taxes and create income-splitting opportunities for their estates. He also suggests they draw up a proper investment plan using low-cost managed funds or exchange-traded funds to cut their costs and boost their returns.

Client situation

Carol, 65, and Cameron, 55

The problem

How to draw on their various retirement savings pools in a tax-effective way.

The plan

Cameron collects a salary from their company for as long as possible and contributes to a spousal RRSP for Carol. Meanwhile, Carol withdraws enough money from her own RRSP to set up an RRIF to take advantage of the pension income-tax credit. Additional withdrawals from her personal RRSP would supplement her income now while lowering her RRIF withdrawals later.

The payoff

Preservation of their hard-earned capital and a secure retirement.

Monthly net income

$6,000

Assets

Cash $3,500; U.K. investments $380,000; stock $5,000; investments held by corporation $270,000; TFSAs $18,000; his RRSP $270,000; her RRSP $175,000; residence $410,000. Total: $1,531,500

Monthly disbursements

Property tax $330; utilities, insurance, maintenance $600; auto expenses $670; groceries $625; clothing $150; line of credit payment $410; gifts $100; charitable $100; travel, including food, gasoline, etc. $2,000; dining out $100; sports and hobbies $280; other personal $200; dentists, prescriptions, drugstore $175; telecommunications $50; U.K. pension contribution $200. Total: $5,990

Liabilities

Line of credit for car $18,000

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