Jordan and Joy have raised two children, paid off the family home and cottage, and amassed substantial savings and investments. Jordan, who is age 58, runs his own successful technical business while Jill, 57, is a self-employed consultant. Neither has a company pension.
Jordan’s business grosses about $400,000 a year, from which he draws a salary of $75,000 a year and more if needed. Joy bills about $50,000 a year.
Now they’re looking to retire from work, Joy as soon as possible and Jordan gradually, going from full to part-time in a couple of years and hanging up his hat for good at 65. They want to spend two or three months in a warmer climate each year and do some adventure travelling. “Is this feasible?” Joy asks in an e-mail.
When the time comes, they’d like to help their two children – age 22 and 26 – buy a first home. They are also planning to leave them the family cottage.
“What is the most tax-efficient way of drawing our retirement income?” Joy asks. Their retirement spending goal is about $145,000 a year after tax.
We asked Warren MacKenzie, a fee-only financial planner in Toronto, to look at Jordan and Jill’s situation. Mr. MacKenzie holds the chartered professional accountant (CPA) and certified financial planner (CFP) designations.
What the Expert Says
The couple have accumulated more than enough to achieve all their financial goals, Mr. MacKenzie says. “They can retire any time and still leave an estate of more than $2-million for children.
“Jordan is planning to do some consulting work at least until age 65 and this will mean they’ll have an even larger surplus, which they can spend or give away,” the planner says. At their age there is about a 50 per cent chance that one of them will live to age 90, Mr. MacKenzie says. They could be retired for 30 years, “so this additional consulting work will help keep Jordan occupied and his mind sharp.”
Currently, Jordan owns and runs a small business through a private corporation. For the next seven years, until age 65, Jordan will work part time and draw as a salary of about $150,000 per year. In addition to earning active business income, the corporation earns passive income on $169,000 in dividend-paying Canadian equities, the planner notes.
The shares of the corporation are owned jointly and at some point, Jordan and Joy will want to simplify their affairs and wind up the corporation. “To get the cash in their hands, they’ll have to pay themselves salaries or dividends,” the planner says.
Given that the couple are both in good health and expect to live at least into their mid 80s, and they have significant nonregistered investments on which they’re paying income tax, they should plan to use their existing registered and nonregistered investment portfolios to fund lifestyle expenses and delay the start of Canada Pension Plan and Old Age Security benefits until age 70. By doing so, their CPP benefits will be 42 per cent higher and their OAS 36 per cent higher than if they took them at age 65.
When they’re about 70, and assuming adjustments for inflation, their expenditures will have risen to $160,000 for lifestyle plus $30,000 for income tax. This will be funded by about $60,000 from CPP and OAS, about $80,000 from their RRSPs – converted to registered retirement income funds – and the balance of $50,000 from their nonregistered accounts, the planner says.
“Once Joy retires, she will have no income so she should immediately turn her RRSP into a RRIF and start to draw at least $40,000 per year,” Mr. MacKenzie says. By doing this she will be able to have a significant amount of her RRIF taxed at a lower rate than she would pay if she collected payments from a larger RRIF at the same time as she is collecting CPP and OAS.
Jordan and Joy are not concerned about possible future health care costs because if they encounter them, they could sell their home to cover the costs. They also have a joint and first-to-die life insurance policy that will pay $600,000 to the survivor if one of them dies before March, 2043.
“For the rest of their lives income tax will be their biggest single expense,” Mr. MacKenzie says. Because they want to save tax and help their children buy their first home, for the next five years they should give their children $8,000 each year (lifetime limit of $40,000) so that they can each open a tax-free first home savings account.
The federal FHSA is a new type of savings account that came into effect on April 1, 2023. Contributions to the FHSA are deductible for tax purposes and income earned in a FHSA is not taxable. The funds can be withdrawn tax-free when the money is used to purchase a first home.
Based on reasonable assumptions (inflation at 2 per cent and expected rate of return of 5 per cent), if Jordan and Joy make it to age 100, they will still have a net worth of more than $2-million in today’s purchasing power, Mr. MacKenzie says.
Jordan and Joy are planning to leave their cottage to their children, the planner notes. “They should be aware that leaving a cottage to children increases the probability of their heirs quarrelling some time in the future,” he says. “The reality is that in the future their children are likely to have different abilities to fund cottage expenses, one may have more children than the other, there may be conflicts when each wants access to the cottage during certain holidays and there may be a disagreement as to when the cottage will eventually be sold.”
“It is often better for parents to sell the cottage, give the heirs the money and let them buy their own cottage and create their own memories,” he says. Before making a final decision, the couple should discuss these concerns with their children.
Jordan manages about half of their entire investment portfolio with the other half managed by an investment adviser. Their asset mix is 7 per cent fixed income and 93 per cent mostly Canadian dividend-paying stocks.
“Given that they can achieve all of their financial goals with a low-risk portfolio, they should reduce their exposure to stocks and put themselves in a lower-risk, goals-based asset mix,” the planner says. “In their case, based on reasonable assumptions, they can achieve their goals with an asset mix of 60 per cent in stocks and 40 per cent in fixed income.
They also are overdiversified, with a total of 98 different positions, many of which are exchange-traded funds, or ETFs.
“After investment management fees, with this level of overdiversification they are unlikely to do better than a single, broad-market index fund,” Mr. MacKenzie says.
The People: Jordan, 58, Joy, 57, and their two children, 22 and 26.
The Problem: Nothing, really, but they wonder about the most tax-efficient way to draw down their savings and whether Joy can afford to quit work now.
The Plan: Joy retires, and Jordan keeps working and earning to age 65. They set up FHSAs for their children, giving them $8,000 each for the next five years. Consider selling the cottage and giving the proceeds to their two children to avoid potential strife later. Simplify their investments so they can easily follow a disciplined rebalancing strategy and lower their exposure to the stock market.
The Payoff: The comfort of knowing they have more assets than they’re likely to ever need.
Monthly net income (variable): $10,655.
Assets: Bank accounts $136,855; cash equivalents $205,000; joint stock portfolio $825,000; corporate account $170,000; his TFSA $144,000; her TFSA $147,940; his RRSP $577,000; her RRSP $466,025; registered education savings plan $8,185; residence $1,000,000; cottage $900,000. Total: $4.6-million.
Monthly outlays: Property tax $585; water, sewer, garbage $80; property insurance $385; electricity $145; heating $145; maintenance, garden $125; car insurance $380; fuel, oil, maintenance $415; groceries $1,310; clothing $200; gifts, charity $300; vacation, travel $2,100; other discretionary $420; personal care $100; club membership $100; dining out, entertainment $250; pets $175; sports, hobbies $75; subscriptions $50; prescriptions, supplements $330; health, dental insurance $635; life insurance $910; communications $355; TFSAs $1,085. Total: $10,655.
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