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Their plan is for Abigail to take her pension and for Morris to withdraw from his RRSPs to sustain their lifestyle.Fred Lum/The Globe and Mail

In their mid-50s, Morris and Abigail are getting tired of their work and would like to retire early in 2025. They’d be leaving behind a combined salary of $335,000 a year plus Morris’s bonus. Morris is 54 and works in sales, while Abigail is 56 and works in health care. They have two children, 17 and 19, and a mortgage-free home in the Greater Toronto Area.

The children figure prominently in their planning.

Abigail has a defined benefit pension that will pay $52,885 a year starting in 2025 plus a bridge benefit of $15,150 a year that will end when she turns 65. Morris has a small DB pension that will pay $7,700 a year at age 65. Morris also has a defined contribution pension at work to which he contributes five per cent of his salary and his company matches it.

Their plan is for Abigail to take her pension and for Morris to withdraw from his RRSPs to sustain their lifestyle, Morris writes. They would also take dividends from their non-registered accounts. They plan to continue contributing to their tax-free savings accounts (TFSAs).

“We invest primarily in blue-chip dividend-paying stocks along with some exchange-traded funds for U.S. and international exposure, guaranteed investment certificates and bond ETFs,” Morris adds.

“Can we sustain spending of $110,000 a year after taxes until age 95?” Morris asks. “Should we convert one or both of our RRSPs to registered retirement income funds (RRIFs) upon retirement? Would we be in a position to pass on the sums in our TFSAs, non-registered accounts, and home to our children when we pass away?”

We asked Kaitlyn Douglas, a certified financial planner (CFP) at Manulife Securities Inc. in Winnipeg, to look at Morris and Abigail’s situation. Ms. Douglas also holds the chartered financial analyst (CFA) designation.

What the expert says

“Initially, when I learned that the clients wanted to leave the TFSAs untouched as an estate asset, I had some reservations,” Ms. Douglas says. “However, while building the retirement plan, it soon became evident that this is not just a retirement plan, but in fact, and more importantly, an estate plan.”

Because the clients have defined benefit pension plans and non-registered assets, and have saved quite a bit during their working years, “we are able to run a retirement scenario that leaves the TFSAs for last, untouched under the following assumptions,” the planner says: that the inflation rate averages three per cent, the rate of return on their investments five per cent and that Morris and Abigail pass away in 2064, Morris at 95 and Abigail at 97.

The planner assumes a blended liquidation strategy of non-registered and RRIF withdrawals, assuming their registered retirement savings plans (RRSPs) are converted to RRIFs upon retirement.

The clients can leave the TFSAs untouched and name their two children contingent beneficiaries, Ms. Douglas says. By naming a beneficiary, the assets are passed to the children directly, avoiding probate and legal fees. “As well, because there are no, or at least limited, tax implications of a TFSA upon death, there is no tax-withholding issue with paying the beneficiaries the money directly,” she adds. That means they won’t have to give back some of the TFSA proceeds to cover the parents’ estate tax bill, which can happen with RRSPs and RRIFs.

Starting with the above assumptions and assuming a retirement spending target of $110,160 a year after tax, indexed to inflation, the planner first looks at the effect of government benefits on the estate plan. In a nutshell, deferring government benefits leaves a larger estate.

If Morris and Abigail defer Canada Pension Plan (CPP) and Old Age Security (OAS) benefits to age 70, “the result is 100-per-cent goal coverage with $5.5-million remaining in their estate when they pass,” Ms. Douglas says. Most of that would come from Morris’s TFSA at $2-million, Abigail’s TFSA at $1.6-million and their residence at a projected value of $1.4-million. The balance would be the remaining RRIF and non-registered assets.

Deferring CPP until age 70 gives the clients a 42-per-cent increase and OAS a 36-per-cent increase. “Doing so allows the clients to draw down on their registered assets sooner, potentially lessening the impact of taxes for the estate and giving them a guaranteed rate of return larger than what we can comfortably assume they could earn,” the planner says. By deferring government benefits, the clients’ estate would have about $380,000 more than if they took them at age 65.

“Seeing as this retirement plan tends to work any way that you look at it, the real determining factor is the estate plan at the end,” Ms. Douglas says.

Next, she looks at an event that could hurt the estate value. “Something that is not always considered with retirement plans is the idea of one spouse dying earlier than expected,” the planner says. Because Abigail has the larger defined benefit pension plan with a 60-per-cent survivor payout, Ms. Douglas looks at what would happen if Abigail were to die prematurely at age 75.

In this case the value of their estate would fall to $2.4-million, less than half the $5.5-million in the optimal situation. The non-registered and RRIF assets would be exhausted, leaving the residence at $1.4-million and Morris’s TFSA at $1-million.

“We often see the negative tax implications of single people, whether widows or widowers, divorced or single,” Ms. Douglas says. As a widower, Morris would lose the ability to pension-split the defined benefit pension, the other spouse’s OAS and the majority of the CPP, she says. Morris would also lose 40 per cent of Abigail’s defined benefit pension. He would need to draw more income from his investments to meet his income requirement.

“Morris could end up spending less than what they spent together, but losing a spouse in retirement does not automatically cut your expenses in half,” the planner says. Many expenses such as property taxes, house insurance or rent, stay the same, regardless of whether it is one person or two. Morris’s retirement would plan still work, but he would have some or all of his OAS benefit clawed back.

“The even larger impact is seen with the estate assets,” Ms. Douglas says. “If Abigail passed too soon, the amount left to their children if Morris lived until age 95 would be almost $3.2-million less.”

The situation would improve if Abigail took a 75-per-cent joint survivor benefit, the most her pension plan allows, even though it would mean a three-per-cent reduction in benefits. The estate would be left with $2.5-million, about $152,000 more than with the 60-per-cent survivor benefit.

“What started out as a regular, run-of-the-mill retirement plan has evolved into more of an interesting estate planning case,” Ms. Douglas says.

Client situation

The people: Morris, 54, Abigail, 56, and their two children.

The problem: Can they meet their retirement spending goal while still leaving much of their assets, particularly their TFSAs and their house, to their children?

The plan: Retire as planned, deferring government benefits to age 70. Abigail might want to consider choosing a 75-per-cent pension survivor benefit rather than 60 per cent.

The payoff: A legacy they likely hope will extend to their children and eventually their grandchildren as well.

Monthly net income: $17,000.

Assets: Cash and equivalents $96,000; joint non-registered investments $155,000; Morris’s non-registered portfolio $430,000 in securities plus $68,000 in cash; his TFSA $155,000; her TFSA $100,000; his RRSPs $850,000; her RRSP $280,000; market value of his defined contribution pension $57,000; registered education savings plan $150,000; residence $600,000 (underestimated at Morris’s request). Total: $2.94-million.

Estimated present value of Morris’s DB plan $150,000; estimated present value of Abigail’s DB plan $1.1-million.

Monthly outlays: Property tax $580; water, sewer, garbage $100; home insurance $110; electricity $100; heating $225; maintenance, garden $630; transportation $925; groceries $1,300; clothing $100; vacation, travel $1,250; new car fund $780; dining, drinks, entertainment $700; personal care $100; club memberships $90; pets $250; sports, hobbies $210; subscriptions $80; health, dental insurance $240; life insurance $60; phones, TV, internet $265; TFSA contributions $1,085. Total: $9,180.

Liabilities: None.

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