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financial facelift

Shannon VanRaes/The Globe and Mail

In the year or two after her husband died, Irene got a crash course in financial planning, hiring and firing a series of investment advisers, selling her stocks and then reinvesting, and plotting a strategy to hang on to as much of her Old Age Security benefits as possible.

“I now manage my investments entirely on my own,” Irene writes in an e-mail. She is age 66 and retired with no dependants. She owns her Manitoba house outright. Irene has a tax-free savings account and a large registered retirement savings plan with a discount broker, “all stocks,” Irene writes. She has a smaller TFSA, “all cash in a variable savings account,” a registered retirement income fund in a five-year GIC at 5.1 per cent, and a savings account.

Her regular monthly income includes slightly more than $1,000 a month in Canada Pension Plan benefits and a small defined benefit pension that pays slightly less than $1,200 a month. The balance she draws from her RRSP. “I have deferred OAS to age 70 because I want to avoid having all of it clawed back, but I don’t think that’s possible,” Irene adds.

“I already do whatever it is I want to do, be it travel, home renovations or whatever,” Irene writes. “My main concern, my main goal, is to ensure that I have enough money to live independently until the very end of my life, meaning in my own home or apartment, with paid care if necessary. Her spending target is $90,000 a year after tax.

We asked Kaitlyn Douglas, a certified financial planner at Manulife Securities Inc. in Winnipeg, to look at Irene’s situation. Ms. Douglas also holds the chartered financial analyst designation.

What the expert says

“Irene is looking to determine if it is better to draw down her RRSP now and incur larger tax bills, or leave the RRSP and face the clawback of her OAS benefits when she begins taking them at age 70,” Ms. Douglas says.

Irene already has cashed out $335,000 from her RRSP, the planner says. “If she continues on this path, and if inflation was to average 4 per cent, it is possible she would run out of money in her mid-80s,” Ms. Douglas says. “It’s a common strategy we see from people who have recently lost their spouses, but one that is ill-advised.”

For 2022, the clawback of OAS benefits starts at income of $81,761; OAS is fully clawed back (age 65-74) at $134,626 and for ages 75 plus, at $137,331.

“We ran a few different scenarios through our financial planning software to determine the best route for Irene,” the planner says. Scenarios 1 and 2 assumed an inflation rate of 2 per cent, an average rate of return on investments of 4.59 per cent, and that Irene lives to age 90.

In Scenario 1, using her current RRSP balance of about $942,000, Irene does not draw down her RRSP early. “She would be able to draw a net income of $7,500 a month (all sources) and would have 100 per cent goal coverage (she would meet her retirement spending goal) for the remainder of her retirement, with about $58,000 in assets – not including her house – remaining at age 90,” the planner says. Her OAS would be clawed back throughout.

In Scenario 2, Irene withdraws $200,000 a year for four years from her RRSP. She invests the after-tax amount in her non-registered investment account. “In this case, there is only 96 per cent goal coverage, and Irene begins to run out of money when she is 89 years old.” This way, the minimum RRIF withdrawals would not trigger a clawback of OAS and she would avoid the clawback for most of her retirement.

“In an attempt to avoid OAS clawback, Irene is paying more in income tax early on, in effect, inflicting her own form of clawback,” Ms. Douglas says.

With inflation a concern, the planner ran a third scenario, this time assuming a 4-per-cent inflation rate and the RRSP drawdown in Scenario 2. “In Scenario 3 Irene has only 83 per cent goal coverage for her retirement and she begins to run out of money when she is 84 years old.”

Part of the challenge is the negative tax implications for seniors who are single, widowed, or divorced, the planner says. “As a widow, Irene loses the ability to pension split her RRIF income or defined benefit pension plan with a spouse,” she notes. “By not having that ability, she ends up having her OAS clawed back.”

Being part of a couple lessens the likelihood of OAS clawback. As well, with a couple the clawback limits are twice as much – $81,761 each.

Maintaining some RRIF monies in the future would give Irene the option to pension split if she enters into a new relationship at a later time, the planner says.

If Irene earns a higher rate of return, then each of the scenarios would look more promising, Ms. Douglas says. “Irene buys and sells individual securities so it is important to ensure she has a disciplined approach and monitors her risk tolerance and capacity.”

If the mandatory withdrawals from her registered accounts exceed her needs, the surplus after tax could be transferred to Irene’s non-registered account. “Irene could consider corporate class investments in the non-registered account to lessen her tax liability.” Corporate class investments are set up within a corporate structure for tax purposes, she says. “The benefit is that you are able to switch between classes without triggering a capital gain.” The class structure allows the taxpayer to defer tax.

Client situation

The person: Irene, 66

The problem: Is it a good strategy to melt down her RRSP to try to save some of her OAS from being clawed back? Will her capital last?

The plan: In Irene’s case, she’s better off preserving her registered savings and accepting that her OAS will be clawed back.

The payoff: Enough money to last to age 90 and she’ll still have the value of her house.

Monthly net income: $6,400 (as needed)

Assets: Bank accounts $172,850, GICs (RRIF) $235,350; TFSAs $230,000; RRSP $942,000; estimated present value of DB pension $275,000; residence $300,000. Total: $2.16-million

Monthly outlays: Property tax $205; water, sewer, garbage $65; home insurance $135; electricity and heating $245; security $20; maintenance $1,000; transportation $420; groceries $600; clothing $100; car loan $605; gifts $300; charity $550; other discretionary $500; dining, drinks, entertainment $385; club membership $65; pets $200; sports, hobbies $115; subscriptions $65; health care $80; communications $255; TFSA $500. Total: $6,410

Liabilities: Car loan $13,860 at zero per cent

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Some details may be changed to protect the privacy of the persons profiled.