Lynne’s situation shows the power of an indexed pension. “I’m a single, 65-year-old woman with a defined benefit pension, and with three adult children,” Lynne writes in an e-mail. She’s been retired for a year and is “living comfortably.” Lynne owns her suburban Toronto home outright. She has a tax-free savings account, a registered retirement savings plan “and some other monies invested,” she writes.
Lynne hopes to sell the family home and move to a condo closer to the city centre. She realizes it will take the sale proceeds and more to buy the place she wants.
Lynne has gifted some money to two of her children ($35,000 each) to help with a down payment on a place of their own. She’s set aside another $35,000 in a term deposit for when the third child decides to buy. The children are 29, 32 and 35.
She wonders whether her investments are a good mix and invested well. “Longevity runs in my family,” Lynne adds. “Dad died at 98 and Mom at 97.” If her financial health is good, “I would rather give my children additional monies over the next years to help them be financially secure rather than waiting until I pass away,” Lynne writes. “How much can I spend annually without running out?” She also wonders when she should begin drawing Old Age Security and Canada Pension Plan benefits.
Because she worked in the civil service, Lynne has a defined benefit pension indexed to inflation. It is paying $66,650 a year before tax. Lynne’s retirement spending goal is $65,000 a year after tax, more than she is spending now because her travel opportunities have been limited by the pandemic.
We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Lynne’s situation.
What the expert says
Lynne is being sensible in wanting to help her children while they are young and can most use the financial help, Mr. MacKenzie says. In addition to money toward a down payment, she’d like to be able to give them occasional loans for major purchases, “plus a few thousand dollars each year,” the planner says. Thanks mainly to her defined benefit pension, she can afford to do this, he says.
Lynne wants to give each of her three children $10,000 every five years. “In the first years before age 70, the point at which I recommend she starts collecting CPP and OAS benefits, the most tax efficient source of the funds for gifting is to take the money from her RRSP,” the planner says.
“One might ask, why take the money out of her RRSP and pay tax on the withdrawals when she could take it out of her non-registered savings and not trigger tax?” he says. “The answer is that it’s more tax efficient to pay tax a few years sooner, but at a lower marginal tax rate, than to delay and eventually pay at a higher marginal tax rate.” Lynne will have to convert her RRSP to a registered retirement income fund at age 71 and begin making mandatory withdrawals in the year she turns 72, and at that time her marginal tax rate will be higher.
Because her pension income will be in the $70,000 range from now to age 70 (and will be more than $100,000 after age 70), it makes sense to turn her RRSP into a RRIF and take out sufficient income each year to bring her taxable income up to $90,287 (rising with inflation), the top of that mid-range tax bracket, the planner says. “By doing this each year, in the future less of her income will be taxed at the higher rate that applies to taxable income over $90,287.” In addition, a smaller portion of her OAS will be clawed back, the planner says. “This will mean that most of her RRIF payments will be taxed at the marginal rate of 31.48 per cent instead of the marginal rate of 43.41 per cent that will apply when she is collecting CPP and OAS.”
After age 70, when she is collecting CPP and OAS, she will have more money than she needs “so the gifting from then on will come almost entirely from her annual cash flow,” the planner says. By the time Lynne is 71, her pension income plus her government benefits will be more than $100,000 (indexed to inflation), Mr. MacKenzie says.
It makes sense for Lynne to defer government benefits to age 70 because longevity runs in her family, he says. “The breakeven point is the early 80s. Since she expects she may live to age 100, she’ll be able to spend more and also leave a larger estate by delaying the start to age 70,” he says. “This will mean her CPP benefits will be 42 per cent higher and her OAS benefits 36 per cent higher.”
Lynne is currently spending about $54,000 a year plus income tax and that includes $13,500 a year on gifts, charity and travel, Mr. MacKenzie says. For planning purposes her target spending is $65,000 a year plus income tax. “To be cautious in estimating her future needs, we assumed that she would spend 10 years in a nursing home (or home care) costing $100,000 a year in today’s dollars starting at age 90,” the planner says. She would sell her condo then.
Lynne asks whether she can afford to pay $1.2-million for her new condo if she sells her existing place for $1-million net of expenses. Mr. MacKenzie assumes she takes $100,000 from her TFSA and $100,000 from her non-registered investments to cover the cost of the higher-priced residence. “Given that even with the higher cost of the condo she will still be spending within her budget, and it will make little difference in the size of the estate, she should invest in the condo that she believes will give her the greatest enjoyment over the next 20 or 30 years,” the planner says. “If the condo costs more, it is reasonable to assume it will be worth more when it is eventually sold.”
As for Lynne’s investments, her asset mix is 63-per-cent equities and 37-per-cent fixed income, Mr. Mackenzie says. The stock portion is well-diversified, but since Lynne can achieve her goals with a low-risk portfolio, and since markets are near their record highs, and optimism is at extreme levels, she should consider reducing her exposure to equities, the planner says.
The person: Lynne, age 65, and her three adult children
The problem: Can she afford to help her children financially, buy a more centrally located condo and still have enough to meet her needs to age 100?
The plan: Go ahead and help the children. Take the money from her RRSP for the first few years. Then, when she begins taking government benefits, she’ll have a surplus so she can use that. Buy the condo once the house is sold, taking money if needed from her TFSA and non-registered accounts.
The payoff: The pleasure of helping her children financially while they are getting established, and the comfort of knowing she will not run out of money.
Monthly net income: $5,285
Assets: Cash $5,000; short term $120,000; stocks $40,000; TFSA $101,000; RRSP $107,000; estimated present value of DB pension $1.2-million; residence $1-million. Total: $2.57-million
Monthly outlays: Property tax $420; home insurance $35; utilities $240; maintenance $300; garden $150; transportation $360; groceries $575; clothing $200; gifts $400; charity $225; vacation, travel $500; dining, drinks, entertainment $525; personal care $40; sports, hobbies $40; subscriptions $50; health care $60; health insurance $155; communications $220; TFSA $500. Total: $4,995
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Some details may be changed to protect the privacy of the persons profiled.
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