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Tom and Liza hired an adviser to assess whether they should draw on their registered retirement savings plans (RRSPs) first or leave them intact as long as possible.Todd Korol/The Globe and Mail

After 35 years of working for the city, Tom is keen to retire in January. He is 58 and earns more than $155,000 a year. His wife, Liza, is 59 and plans to retire at the same time, leaving behind a $95,000 job in education.

They both have defined benefit pension plans partly indexed to inflation. Tom’s would pay up to $93,440 a year, depending on the survivor benefit, and Liza’s $22,300. They have a mortgage-free house, a rental property and three adult children.

When they leave the working world behind, they plan to “travel the world,” Tom writes in an e-mail. They also want to winter in a warmer climate, perhaps in Europe, and get involved in volunteer work at home. “Learning to sail is on our agenda and we hope to take formal lessons next spring,” Tom writes. “Depending on how that goes we may entertain purchasing a used sailboat.”

Tom and Liza hired an adviser to assess whether they should draw on their registered retirement savings plans (RRSPs) first or leave them intact as long as possible. The adviser said to leave them as long as possible. “This really does not make too much sense to me,” Tom writes. They also ask when they should begin drawing government benefits.

The question they have the most difficulty with, Tom writes, is which pension survivor option he should take since he has the larger pension: a two-third survivor benefit or the joint lifetime benefit?

Their retirement spending target is $110,000 a year after tax.

We asked Ian Black, a fee-only financial planner at Macdonald, Shymko & Company Ltd. of Vancouver, to look at Tom and Liza’s situation. Mr. Black holds the advanced registered financial planner (RFP) and trust and estate practitioner (TEP) designations.

What the expert says

Tom and Liza’s retirement spending target is substantially higher than what they are spending now after taxes and saving, Mr. Black says. As well, many of their current outlays will end or be reduced after they have retired. “That said, travel expenses will increase significantly.”

“Even on relatively conservative assumptions, their maximum sustainable spending to Liza’s age 101 is about $137,000 per year, a substantial margin of safety.”

His forecast assumes a life expectancy for Tom of 100 and for Liza 101, a blended rate of return on their combined portfolio of 4.26 per cent and an inflation rate of 3 per cent. Their pension income is indexed to 60 per cent of inflation, or 1.8 per cent a year at 3-per-cent inflation.

When picking a pension option, the trade-off is between a higher guarantee (joint life) and a higher monthly cash payout (single life). This includes variations such as joint unreduced or single guaranteed for 15 years.

“In their case, the difference between picking the riskiest available options (single life, guaranteed for five years) and the safest options (joint life unreduced) is about $6,000 of total after-tax spending per year for Tom’s pension,” Mr. Black says. “Given that their available maximum spending is already $27,000 higher than their target, they should take the lowest paying, but least risky option – the joint life unreduced,” the planner says. “We estimate this would be $86,950 annually” rather than $93,440.

If Tom’s life were cut short, a riskier pension option could lead to a sharp reduction in Liza’s retirement income below their target level, he notes. If, for instance, Tom were to die at 62, and if he had chosen the riskiest pension option, the forecast maximum spending would tumble from $137,000 a year to $80,000.

If Tom were to die at 62 and had chosen the joint life unreduced option, the maximum available spending would be $111,800 over the life of the forecast (rather than $80,000). Liza would lose Tom’s Old Age Security and some of his Canada Pension Plan benefit.

For Liza’s pension options, she should choose the joint and survivor pension, which would be reduced by one third on her death, Mr. Black says. This would provide $1,977 monthly on retirement. Her OAS would also be lost on her death, but Tom’s pension would more than cover his expenses.

As to when to begin drawing on their RRSPs, the recommendation to leave them to grow for as long as possible is probably the better choice in Tom and Liza’s case, Mr. Black says. “Our projections confirm that this suggestion is likely to be most financially advantageous.”

However, the difference between starting RRSP or registered retirement income fund (RRIF) withdrawals at age 60 or at age 71 is only about $500 of after-tax spending a year, the planner says. Either choice would still allow them to meet their goals.

“We do not project any OAS clawback because up to 50 per cent of Tom’s pension can be split with Liza, thereby equalizing their taxable income below the clawback threshold,” Mr. Black says.

“With their financial goals achieved, in the interest of further protection from longevity risk, we would suggest deferring CPP until age 70,” the planner says. Deferring CPP and leaving the RRSP/RRIF assets to grow on a tax-deferred basis would likely mean they would have to draw down non-registered or even TFSA assets, depending on their level of spending, in the years before government benefits begin, he says.

Conversely, starting CPP at 65 would allow for other assets (RRSP, TFSA and non-registered) to be maintained longer or gifted to their children. Either option (CPP at 65 or 70) still allows them to meet their spending goals.

To summarize, Tom and Liza will rely primarily on their pensions, and draw on non-registered assets if needed, when they first retire. If non-registered assets are depleted, they can access their TFSA assets until CPP and OAS commence. At that point, they are projected to have surplus savings capacity.

In all scenarios, Mr. Black assumes their residence is not sold.

Finally, they should ensure their estate planning is up to date, with valid wills and powers of attorney for finance and health. Their current wills are 20 years old and were prepared when their children were very young, the planner notes. “Also, as Tom and Liza’s wealth may continue to increase throughout retirement, it may be possible to gift funds to their children prior to passing,” Mr. Black says.

Client situation

The people: Tom, 58, Liza, 59, and their three children, ages 28 to 32.

The problem: Can they meet their spending target? Which savings vehicle should they draw on first? Which pension survivor benefits should they choose?

The plan: Retire as planned in January, drawing on work pensions and non-registered savings first. Defer government benefits to age 70. Leave RRSPs and RRIFs to grow. Tom takes the least risky pension survivor option, joint life unreduced.

The payoff: A better idea of how much they can afford to spend.

Monthly net employment income: $14,570 (excludes rental income).

Assets: Bank accounts $56,000; his non-registered investments $355,500; her non-registered $146,000; his guaranteed investment certificates $103,500; her GICs $80,300; his TFSA $104,000; her TFSA $110,500; residence $470,000; rental property $290,000; her RRSPs (personal and spousal) $445,500. Total: $2.16-million.

Estimated present value of his pension: $1,504,000; estimated present value of her pension: $425,000. That is how much someone with no pension would have to save to generate the same cash flow.

Monthly outlays: Property tax $550; water, sewer, garbage $85; home insurance $160; electricity $85; heat $120; maintenance $425; garden $25; transportation $660; groceries $950; clothing $100; gifts $40; charity $800; vacation, travel $50; dining, drinks, entertainment $305; personal care $40; club memberships $120; pets $90; sports, hobbies $220; subscriptions $25; other personal $50; drugstore $45; vitamins $50; health, dental insurance $50; phones, TV, internet $230; RRSP contributions $970; TFSAs $1,085; pension plan contributions $1,100. Total: $8,430. Surplus goes to savings, travel.

Liabilities: None.

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

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