Kevin and Lara want to quit working as soon as possible, but they’re not sure they can afford to. They are both age 58 with three children in their early 20s, two of whom are students still living at home.
“My husband works in logistics and I work in higher education,” Lara writes in an e-mail. “My employment contract ends soon and I am not sure whether I will be offered another role as funds are tight due to COVID-19,” Lara adds. She earns $111,000 a year, he earns $67,000.
They live in a condo in Vancouver with a small mortgage they hope to pay off in a couple of years. Lara has a defined-benefit pension plan with her current employer as well as a smaller one from a previous job.
She’d like to retire from work this year and Kevin in two years without ever having to remortgage or sell their home. They estimate they would need about $75,000 a year after tax.
If they do retire, “Should we take our Canada Pension Plan at age 65 or defer it to age 70?” Lara asks. “When should we turn our RRSPs into registered retirement income funds?”
We asked Keith Copping, a fee-only financial planner at Macdonald, Shymko and Co. Ltd. in Vancouver, to look at Kevin and Lara’s situation. Mr. Copping holds both the certified financial planner (CFP) and the advanced registered financial planner (RFP) designations.
What the expert says
Lara and Kevin have savings and investable assets of $1.47-million, Mr. Copping says. The commuted value of Lara’s two pensions is $284,000 and their home is worth $900,000. Kevin is expecting a gift from his parents – an early inheritance – of $300,000 next year, which the planner has included in his calculations of future years. On the other side of the balance sheet, they have a $66,000 mortgage that they aim to pay off in two years.
Based on Mr. Copping’s calculations, Lara and Kevin can afford to retire as planned, she at age 58 and he at 60. They could even surpass their spending target, the planner says. His forecast assumes they spend $80,000 a year (after tax) when they retire, about the same as their basic lifestyle spending now, excluding mortgage payments and savings. They could sustain spending of as much as $104,000 a year, but keeping it at $80,000 will allow greater financial security in case inflation returns or expenses are higher than anticipated, Mr. Copping says.
The planner assumes an average rate of return on their investment portfolio of 4 per cent based on their asset mix of 50 per cent equities and 50 per cent cash and fixed income. He assumes an inflation rate of 2 per cent and that they both live to age 100.
The smaller of Lara’s two pensions will pay $6,070 starting at age 65, partly indexed. The planner assumes Lara chooses a joint and survivor pension with a 100-per-cent benefit to the spouse. This pension option pays a lower amount but continues until both spouses are deceased. Her larger pension – assuming the same survivorship benefit – will pay $19,220 a year at age 65, partly indexed. The pension benefit would fall to $16,650 a year if she started it at age 60.
Lara estimates she will get $10,100 a year of Canada Pension Plan benefits at age 65 and Kevin $13,410.
If they retire as planned and spend $80,000 a year, “their tax-free savings accounts are never touched, growing throughout retirement and forming part of their estate,” the planner says. Although they will draw from their non-registered assets, “the level of withdrawal is lower than the projected growth, and so these assets may also grow modestly throughout retirement,” he adds. “We do not expect they will need to tap into their home equity.”
Should they defer CPP and Old Age Security to age 70? “Yes,” Mr. Copping says. The larger benefits will help guard against “extreme longevity” where they could outlive their savings, he adds. “We expect they should be able to avoid the OAS clawback” as well.
While the forecast assumes Lara starts both her work pensions at age 65, “there are some considerations” for starting at least the larger pension earlier, at Lara’s age 60 when Kevin retires and loses his group medical benefits. By doing so, they might be able to get retiree medical benefits under Lara’s pension plan. “Also, this pension income at age 60 will qualify for pension splitting, so she can split up to 50 per cent with Kevin to provide some potential family tax savings,” Mr. Copping says. “Pension income splitting does not apply to RRSP withdrawals but will apply to future RRIF withdrawals from age 65 on,” he says. “It will apply to Lara’s pensions as soon as they start, even before age 65.” As well, the first $2,000 of eligible pension income qualifies for the federal pension tax credit. “Splitting allows both spouses to take advantage of this credit.”
Lara could start taking RRSP (or RRIF) withdrawals as part of annual tax planning starting in 2022, when she would no longer have any employment income. “The goal is to average out the income level in retirement rather than having very low-income years to start, then jumping into much higher tax brackets later,” Mr. Copping says. “The initial goal could be seen as taking advantage of the lowest tax brackets” – income up to about $42,000 a year (based on combined federal and B.C. tax brackets and rates).
If they do start drawing on the RRSPs early, “it may make sense to roll a portion of the RRSPs into RRIFs,” the planner says. RRSP withdrawals usually incur transaction fees and require withholding taxes. Rolling a portion to a RRIF would allow more frequent withdrawals – monthly if desired – and eliminate the transaction fees. “For minimum annual RRIF withdrawals, no upfront tax withholding is required.”
Lara has the bulk of the family’s investable assets (some from an inheritance) and reports the investment income, Mr. Copping notes. They plan to use some of Kevin’s anticipated inheritance to pay off the mortgage balance. Given that Lara will have more income in retirement than Kevin, “it would make more sense to use Lara’s savings to pay off the mortgage and invest all of Kevin’s inheritance to increase his share of the family investments.” The first priority would be for Kevin to take advantage of his unused TFSA contribution room. After they have retired, they can focus on spending more of Lara’s assets first rather than Kevin’s. “This can gradually help to provide some more balance between their retirement assets and income levels,” Mr. Copping says.
The people: Kevin and Lara, both age 58, and their children
The problem: Can Lara retire this year and Kevin in two years without selling or refinancing their condo? When should they take CPP?
The plan: Go ahead and retire. Consider converting part of her RRSP to a RRIF and draw on it until Lara begins taking her pensions. Take steps to equalize income in retirement.
The payoff: Financial goals achieved.
Monthly net income: $11,085
Assets: Cash $7,100; her bank deposits $20,130; her GICs $186,675; her non-registered $669,695; his TFSA $27,835; her TFSA $97,990; residence $900,000; his RRSP $191,260; her RRSP $265,940; commuted value of her pensions $284,080. Total: $2.65-million
Monthly outlays: Mortgage $3,000; condo fee $450; property tax $180; home insurance $100; utilities $85; maintenance $25; transportation $740; groceries $1,785; clothing $275; gifts, charity $410; vacation, travel $415; other discretionary $250; dining, drinks, entertainment $770; personal care $35; club memberships $80; pets $200; subscriptions, other personal $150; health care $35; life insurance $255; cellphones $200; phone, TV, internet $170; RRSPs $920; her pension plan contributions $600. Total: $11,130
Liabilities: Mortgage $66,216
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