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Julian and Jane.

Andrej Ivanov/The Globe and Mail

Julian and Jane have recently retired from the work force and have begun to draw on their substantial savings. They are both 66 with two grown children, a mortgage-free home in Southwestern Ontario and no work pensions.

Julian manages the couple’s money using self-directed accounts at a major bank. Their holdings are nearly all in stocks, most of them Canadian. He’s done well, boasting a yield of more than 5 per cent, Julian writes in an e-mail.

They have four key areas of interest, Julian adds: How to generate the most income; “prevent the erosion of the Old Age Security benefit”; minimize the income tax burden; and “find a comfortable and competent professional planner relationship for Jane to prepare for a probable time when she is left to manage the portfolio.”

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Adds Julian: “My experience with investment advisers has not been great, so I struggle with the notion of leaving my wife at the mercy of the marketplace. Finding a reliable and competent adviser is important to us.”

We asked Ian Calvert, a financial planner and portfolio manager at HighView Financial Group in Toronto, to look at Julian and Jane’s situation. HighView is a boutique portfolio management firm.

What the expert says

In addition to their registered investments, Julian and Jane have amassed a joint taxable portfolio of $536,000, Mr. Calvert says. “The first step is to understand what type and amount of investment income will find its way to their tax returns each year.”

With a 5-per-cent yield and the dividend gross-up, they should each report about $15,000 of investment income annually, the planner says. This, combined with their Canada Pension Plan and Old Age Security benefits, will bring their taxable income to about $34,000 each.

Jane’s CPP is quite small, so they should apply to split their CPP to balance out their incomes, Mr. Calvert says. Splitting CPP is different from splitting eligible pension income, which is completed on tax form T1032. In order to split CPP, taxpayers must complete an application.

With base incomes of about $34,000 each, Julian and Jane could comfortably withdraw $43,000 each of taxable income from their registered retirement accounts, the planner says (their RRSPs and Julian’s locked-in retirement account/life income fund).

This would bring their income to $77,000 each – an important number for two reasons, Mr. Calvert says. Firstly, this would position them each below the OAS claw-back threshold, which is $77,580 in 2019. Secondly, they would be taking full advantage of the 29.65-per-cent tax bracket that applies for income from $47,630 a year to $77,313.

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Mind you, there is a potential risk in raising their income so near the OAS clawback threshold, the planner says. Julian is an active trader so he could trigger a capital gain at some point. This would push them over the claw-back threshold. If instead they withdrew enough to bring their income up to $65,000 ($31,000 rather than $43,000), they would still have a $12,000-a-year buffer each for potential capital gains.

If Julian plans to withdraw from his retirement savings, he should first take the maximum amount from his LIRA/LIF and the remainder from his personal RRSP, the planner says. The LIF has an annual maximum withdrawal, which would be about $13,000 for 2020. Using it up first will provide greater flexibility in the long run because if he ever needed to make a larger than normal withdrawal, he could do so from the RRSP.

Julian and Jane should also convert their RRSPs to registered retirement income funds (RRIFs). This will ensure the income qualifies for income splitting if necessary. It will also avoid any RRSP withdrawal fees.

This rate of withdrawal from their registered retirement accounts will give them more income than they require each year, Mr. Calvert points out. Transferring the surplus to their tax-free savings accounts first (until the contribution room is used up) and then to their non-registered accounts will help build a very tax-efficient family balance sheet, he adds.

Their portfolio is heavily invested in Canadian stocks, leaving them with concentration risk, the planner says. The Canadian market is thin and doesn’t include many of the important sectors they would need to be truly diversified.

“This increases their risk and limits their investment opportunities,” the planner says. Including some global stocks would help manage this, he says. If they decide to diversify, it would be beneficial to continue to hold their Canadian stocks in their joint portfolio to ensure they receive the dividend tax credit on eligible dividends, Mr. Calvert says. If they hold global stocks in their non-registered account, the dividends would not get the same preferential treatment.

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Being a self-directed investor does present a significant risk to the family if something were to happen to Julian. There are a few important things he needs to consider as he embarks on his search for someone to manage Jane’s investments after he is gone. Julian should look for a registered portfolio manager rather than a financial salesperson who sells a specific product, the planner says. Portfolio managers have a fiduciary duty to act in their clients’ best interest and to ensure there is no conflict of interest.

Client situation

The people: Julian and Jane, both 66

The problem: How to generate as much income as possible, keep taxes as low as possible and find a trustworthy portfolio manager to manage Jane’s investments if Julian should die before her.

The plan: Split pension income, draw on Julian’s locked-in retirement money first, and seek out a licensed and registered portfolio manager or investment counsellor who would be required by law to put Julian and Jane’s interests first.

The payoff: Comfort of knowing things are being managed well.

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Monthly net income: $9,385 (government benefits and savings)

Assets: Cash $24,000; non-registered stock holdings $536,000; his LIRA $169,000; his TFSA $81,000; her TFSA $78,000; his RRSP $292,000; her RRSP $389,000; residence $500,000. Total: $2.07-million

Monthly outlays: Condo fee $325; property tax $300; home insurance $45; utilities $245; garden $25; transportation $255; groceries $400; clothing $200; gifts, charity $175; vacation, travel $1,200; other discretionary $600; dining, drinks, entertaining $450; personal care $15; sports, hobbies, subscriptions $110; other personal $200; health care $160; phones, TV, internet $200; TFSA $915; non-registered portfolio $1,520. Total: $7,340

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

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

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