After going from a full-time, executive role to a part-time one during the pandemic, Rowena left the work force for good early this year. “I must say the recent downturn in the stock market has made me question my decision,” Rowena writes in an e-mail. She is age 61 and Gerald, her husband, 58.
“Given that ours is a later-in-life, second marriage, and I had a much better-paying career than he, our asset allocation is quite lopsided,” Rowena writes. Most of the assets are Rowena’s so they wonder how best to draw down the savings in a tax-efficient way.
Gerald is earning about $80,000 a year working as a manager at an industrial company. Rowena is getting a Canada Pension Plan survivor benefit of $6,500 a year, which she supplements by drawing $60,000 a year from her registered retirement savings plan.
Once Gerald retires, they would like to take a few “bucket list” trips to Europe as well as spending winter months in California or Arizona. Their goals include paying off their line of credit, their car loan and eventually their mortgage. They ask when to start drawing government benefits and how soon Gerald can retire without jeopardizing their lifestyle. Their retirement spending goal is $80,000 a year.
While they both have adult children, they are not concerned about leaving an estate, Rowena adds. “It would be nice to do so, but more important is not becoming a burden to our children in our later years.”
We asked Janet Gray, an advice-only certified financial planner at Money Coaches Canada in Ottawa, to look at Gerald and Rowena’s situation.
What the expert says
Ms. Gray has prepared alternative forecasts in which Gerald retires from work at age 65, 62 and 60.
Most of the assumptions remain the same. At the current repayment rate, their line of credit will be paid off in 2023, the car loan in 2026 and the mortgage by the end of 2034.
Rowena continues drawing CPP survivor benefits to age 70, at which point she applies for her own CPP benefit. By then her CPP will be 42 per cent higher than if she had taken it at 65.
(If she takes her own CPP at age 65, the survivor benefit would be reduced so she wouldn’t receive more than the individual legislated maximum – in effect, a clawback of some of the survivor benefit, the planner says.)
In Scenario 1, Gerald retires at age 65 and starts drawing CPP and Old Age Security benefits. When Rowena turns 65, she starts drawing on her locked-in retirement account, which she converts to a life income fund, or LIF. She also begins taking OAS.
Both convert their RRSPs to registered retirement income funds (RRIFs) at age 71.
“Most years, starting this year, they will have enough cash flow to fully maximize contributions to one of their tax-free savings accounts – or divide the contribution between both accounts – up to a maximum of $6,000 this year,” Ms. Gray says. Alternatively, they could use the money for travel.
“It’s a great tax-saving strategy to add money regularly to your non-taxable investments – the TFSAs – and spend slowly from your registered investments (RRSPs, LIRAs, LIFs) that are taxed at 100 per cent,” the planner says. This can lower the tax liability for the estate. That’s because the taxable portion of the estate will be diminished or used up entirely and only the TFSAs and primary residence will be left. By Rowena’s age 95, the estate would include the home, which with inflation would be valued at $3.4-million, and the TFSAs. “Little or no tax would be owed by the estate.”
Drawing down taxable investments while building up TFSAs reduces tax spikes that may occur if you have to draw from your RRSP to fund a large purchase like a car or home repairs, Ms. Gray says. In preparing her forecast, the planner assumes a balanced portfolio of 60-per-cent stocks or stock funds and 40-per-cent fixed income, with a projected rate of return of 3.9 per cent before fees.
Based on the above assumptions, their sustainable after-tax spending to Rowena’s age 95 is $82,000 a year, slightly higher than their $80,000 goal, the planner says. That is in addition to the debt repayments, which the planner has factored in to their cash-flow needs.
The withdrawal strategy is as follows: Rowena continues to draw $60,000, adjusted for inflation, from her RRSP to age 71. At 71, she converts her RRSP to a RRIF and withdraws from that. The RRIF withdrawals will be less than the RRSP withdrawals because she will also be getting her increased CPP benefits.
Rowena starts pension splitting with Gerald at age 65 on her annual income tax return.
In Scenario 2, Gerald retires at age 60 rather than age 65 and defers CPP benefits to age 65. Other assumptions remain the same. Their sustainable income is $73,000 a year after tax, short of their $80,000 goal. As well, Gerald’s defined contribution pension savings will be lower because of the shorter work period.
In Scenario 3, a sort of middle road, Gerald retires at age 62. Their sustainable income is $78,000 a year to age 85. Both Gerald and Rowena defer CPP benefits to age 70. At Rowena’s age 85, they could sell the family home and invest the proceeds. Their sustainable income after the house sale would be $200,000 a year. This would potentially pay for higher health-related costs, either as in-home care on nursing home care for one or both of them. Alternatively, if they wanted to keep their home but needed money for medical care, they could explore a reverse mortgage.
In all examples, if they needed money for an unexpected expense earlier on in retirement, they should take it first from their TFSAs or any non-registered funds they might have, Ms. Gray says.
Other items the planner touches on include the mortgage interest rate, currently 1.95 per cent. “I would continue to pay only the required amount and invest the surplus funds in their TFSAs,” Ms. Gray says. If and when the mortgage rate increases, they can reconsider and speak to a mortgage broker for more options.
The people: Gerald, 58, and Rowena, 61
The problem: When can Gerald retire without jeopardizing their retirement spending goals? What is the best way to draw down their savings? When should they start taking government benefits?
The plan: Weigh the alternatives. Gerald could retire as early as age 60 but they would fall a bit short of their target spending and may have to sell the family home at Rowena’s age 85. Draw from their registered savings first.
The payoff: A clearer idea of the choices involved in meeting their spending goals.
Monthly net income: $9,300 (includes RRSP withdrawals).
Assets: Cash $8,000; her registered stocks $12,850; her first LIRA $266,500; her second LIRA $99,000; her TFSA $117,750; her RRSP $650,000; his RRSP $114,700; his TFSA $97,000; market value of his defined contribution pension $800; residence $1.5-million. Total: $2.87-million
Monthly outlays: Mortgage $1,350; property tax $465; home insurance $210; electricity $175; heating $140; maintenance $300; garden $150; transportation $670; groceries $1,300; clothing $150; line of credit $750; vehicle loan $480; gifts, charity $225; vacation, travel $250; dining, drinks, entertainment $800; personal care $200; club membership $120; golf $40; pets $350; sports, hobbies $250; subscriptions $85; health care $80; life, disability insurance $140; cellphones $155; TV $145; internet $55; his pension plan contributions $265. Total: $9,300
Liabilities: Mortgage $194,220 at 1.95 per cent; line of credit $17,200 at 5.2 per cent; vehicle loan $23,800 at 3.2 per cent. Total: $235,220
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Some details may be changed to protect the privacy of the persons profiled.
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