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Dean is age 64, Astrid is 59. They have no children.Todd Korol/The Globe and Mail

Dean and Astrid are in an enviable position, recently retired with more money than they know what to do with – hard-earned savings amassed by modest living and stable careers. He is age 64, she is 59. They have no children.

During their working years, they both enjoyed professional careers, with Dean earning substantially more than Astrid. Astrid, who took early retirement a year or so ago, has a defined benefit pension partly indexed to inflation, of $3,100 a month. She chose to retire early because of their age difference, Dean adds. “We planned to travel during our first years of retirement and will probably start that in earnest next year.”

Their Alberta house is mortgage-free and they have substantial savings and investments. They also have an interest in a rental property.

Dean seems to have a pretty good idea of how to arrange their financial affairs but he is seeking more clarity. When should they take Canada Pension Plan and Old Age Security benefits? What is their maximum sustainable income? And “how to minimize the Canada Revenue Agency cut of our retirement income?”

Their retirement spending goal is $120,000 after tax.

We asked Jeff Ryall, a financial planner and associate portfolio manager at Cardinal Capital Management in Winnipeg, to look at Dean and Astrid’s situation. Mr. Ryall holds the chartered financial analyst (CFA) and certified financial planner (CFP) designations.

What the expert says

Dean and Astrid have been “great accumulators,” adopting a saving mentality and living within their means, Mr. Ryall says. “Seeing your wealth grow for the past 30 years, it’s hard to flip the retirement switch and start decumulating,” the planner says. Except for travel and private home care, most people don’t drastically change their lifestyle during retirement.

In preparing his forecast, Mr. Ryall assumes an inflation rate of 2.1 per cent, a rate of return on their investments of 4.25 per cent net of fees and that they live to age 96. Their portfolio is 75 per cent equities and 25 per cent cash and fixed income with an average management expense ratio of 1.1 per cent.

They begin taking CPP at age 70 and OAS at age 65. OAS is fully clawed back at age 72, when they begin making mandatory minimum withdrawals from their registered savings.

“Dean and Astrid can easily achieve their spending goal of $120,000 a year,” Mr. Ryall says. This would leave them with a future net estate value of $7.5-million after tax (present value $3.55-million in today’s dollars). “They could spend as much as $160,000 after-tax annually, and still have the value of their real estate assets upon the second spouse’s death,” the planner says.

The biggest risk is the premature death of one spouse and the lost tax advantage of income-splitting.

Dean plans to withdraw the funds from his smaller locked-in retirement account and transfer them to his registered retirement savings plan at age 65. He will be able to unlock half the value of his larger LIRA and transfer the funds to his RRSP. The remaining 50 per cent will go to a life income fund, or LIF. They plan to hold on to their real estate.

“Given the assets they have accumulated, tax efficiency and estate planning goals are always going to be conflicting,” Mr. Ryall says. For example, implementing income-splitting strategies and targeting an annual after-tax income of $120,000 is ideal from a tax planning standpoint; the average tax rate is 22 per cent and their marginal tax rate is 30.5 per cent. However, upon turning 72 (respectively), they will be forced to take additional income from their minimum RRIF/LIF (registered retirement income fund and life income fund) withdrawals in excess of their $120,000 target, pushing them into higher marginal tax brackets.

On the other hand, if they were to spend up to $160,000 now, as indicated above, their current tax bill would rise. When it comes to minimizing income taxes, “for them, there are limited options.” Philanthropy is one way to redistribute a portion of their tax dollars to charitable organizations that align with their values and beliefs, he says. Another option could be through permanent insurance, but this goes against their desire to not leave a large estate (but can help with controlling the CRA’s bite of their retirement income).

To achieve $120,000 after tax, Dean and Astrid will aim for $77,000 each in taxable income. Once Dean turns 65, he can split eligible pension income (RRIF/LIF) with Astrid, Mr. Ryall says. Their annual income sources are estimated as: Dean’s rental income $34,000; his LIF income of $31,000; and Astrid’s pension income $38,000. “The remainder of required income for each can be taken from their RRSPs,” the planner says. “If they choose to increase their lifestyle spending, additionally funds can be withdrawn from their non-registered accounts with nil tax consequences.” At Dean’s age 77 and Astrid’s age 72, their tax bill will substantially rise, he says. “This may prompt them to revisit their goals and help family/friends/charities while they are alive.”

Next, the planner looks at the couple’s investments. “They are comfortable accepting investment risk for better returns in the long run,” Mr. Ryall says. Since inception the rate of return on their portfolio is 6.1 per cent gross of fees. Their investment portfolios mostly consist of investment pools. They may want to consider individual securities for their non-registered account, the planner says. “This could give them a bit more control and customization of investment and tax planning, aligned to their personal tax situation.”

He recommends they make minor changes to where they hold fixed income securities, holding less in their non-registered investment account, no fixed income in their TFSAs, and increasing the fixed income allocation in their RRSPs/LIRAs.

Dean and Astrid hold some high-yield bond funds containing securities that are well below investment grade, the planner notes. These make up 10 per cent of their non-registered account and 60 per cent of their TFSAs. “Given the rising interest rate environment and stage in the economic cycle, I don’t believe this investment is necessary,” Mr. Ryall says. “As well, holding a high yield fund with a yield of 9 per cent in their non-registered investment means 30 per cent or more is lost to taxes.”

As for their TFSAs, it appears they have been planning to tap them if additional funds are required so as not to increase their taxable income, the planner says. “My preference for individuals with excess wealth would be to use TFSAs as growth vehicles” – or 100 per cent equity.

The rental property Dean has an interest in ($550,000 or about 13 per cent of their net worth) has had capital cost allowance deducted for many years, the planner notes. Its sale is likely to trigger a “significant taxable event,” the planner says. “Dean should investigate how a sale could impact his tax bill in order to properly plan for it.”

Client situation

The people: Dean, 64, and Astrid, 59

The problem: How much can they afford to spend? How should they draw on their savings while keeping their tax bill to a minimum?

The plan: Consider giving to charity. Split pension income. Adjust portfolio to lower risk and improve tax efficiency.

The payoff: The ability to think beyond “do we have enough” to “what should we do with what we have?”

Monthly net income: $10,000 or as needed

Assets: Cash $80,000; joint non-registered $790,500; his TFSA $80,500; her TFSA $75,500; his RRSP $264,500; her RRSP $303,500; his locked-in retirement account $845,000; his smaller LIRA $21,000, estimated present value of her DB pension $630,000; half-share of cottage $350,000; rental property $550,000; residence $900,000. Total: $4.89-million

Monthly outlays: Property tax $450; utilities $525; home insurance $250; maintenance, garden $300; transportation $975; groceries $1,000; clothing $300; gifts, charity $200; vacation, travel $500; dining, drinks, entertainment $500; personal care $100; pets $200; sports, hobbies $200; subscriptions $50; doctors, dentists $500; drugs $100; health, dental $390; life insurance $50; communications $390. Total: $6,980

Liabilities: None

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