Leonard and Gwen hope to retire in about three years with a spending goal of $144,000 a year after tax, plus $15,000 a year for travel for the first 15 years.Tijana Martin/The Globe and Mail
Content from The Globe’s weekly Retirement newsletter. Sign up here
As high-income earners with no children, Leonard and Gwen are well-fixed financially for the next phase of their lives.
Leonard is 53 years old and earns $275,000 a year in an executive position. Gwen is 56 and makes $90,000 a year in health care.
Gwen has a defined benefit pension plan that will pay $2,190 a month to age 65 and $2,005 a month thereafter. It has a 60-per-cent survivor benefit and a 10-year guarantee.
Their goal is to retire in about three years and maybe live abroad for a while, although they haven’t decided where.
Fattening their balance sheet substantially is the company stock Leonard was granted by a previous employer. “About half of my RRSP value is held in software stock,” Leonard writes in an e-mail. “It doesn’t pay a large dividend, but their formula for delivering outsized shareholder returns for years on end is very rare.”
They’ve recently paid off the mortgage on their Vancouver residence and ask if it is realistic for them to retire early and maintain their current lifestyle. “What is the best strategy to remove the money from our RRSPs and minimize taxes?” Leonard asks. When should they start drawing government benefits?
Their retirement spending goal is $144,000 a year after tax, plus $15,000 a year for travel for the first 15 years. “Anything left over will likely be donated to charities we support.”
In this Financial Facelift, Trevor Fennessy, a certified financial planner and portfolio manager with CWB Wealth Partners in Calgary, looks at Leonard and Gwen’s situation. Mr. Fennessy also holds the chartered financial analyst (CFA) designation.
Trust not in memes when it comes to probate
Personal finance memes are common on social media. One from the U.S. making the rounds is about eschewing a will and placing all assets in a revocable trust (called a living trust in Canada) as the best way to eliminate probate on an estate.
But this strategy is far more complex than a meme lets on, says Errol Tenenbaum, partner at Robins Appleby LLP’s tax, wills and estates group in Toronto.
To get a better understanding of what the implications of a probate debate could be, Globe Advisor reporter Deanne Gage recently spoke with Mr. Tenenbaum here.
For more from Globe Advisor, visit our homepage.
Yes, couples can income-split the CPP – in a way
Income splitting is a perennial hot topic among retirees, writes reporter Erica Alini in this personal finance article, but one aspect of it is often neglected, according to some financial planners: the ability to share Canada Pension Plan payments.
In a country with a progressive tax system, where additional income is subject to a higher tax rate, splitting means attributing some of that money to a spouse or common-law partner who is taxed at a lower rate. Doing so can sizably reduce a couple’s overall tax bill.
Since Canada introduced income-splitting rules for certain kinds of pension income in 2007, retirees have been taking advantage of the tax perk with gusto. But the focus on shifting income from the higher to the lower earner on a couple’s tax return has somewhat diverted people’s attention away from the fact that CPP benefits can also be divided, according to David Field, a certified financial planner and founder of Papyrus Planning.
“CPP pension sharing is a very important thing to look into, especially if there’s a big difference in contributions,” Mr. Field said.
Many people likely aren’t aware of the possibility to allocate part of their CPP benefits to their better half, he added. A quick web search yields some hints why that may be.
Look up “income splitting,” and you’ll find a variety of reputable sources warning that CPP – along with Old Age Security benefits – is not eligible for it.
Read the full article here.
In case you missed it
A brave soul takes on CPP doubters
Part of being a smart skeptic is being able to recognize that some things are actually what they seem, writes personal finance columnist Rob Carrick in this Carrick on Money article.
The Canada Pension Plan is an example. Once you retire, the CPP pays a monthly benefit for as long as you live and adjusts that amount each year for inflation. The CPP has been certified as healthy for the next 75 years by actuaries, who can best be described as the engineers of the financial world. When they stress test something, you can be confident it was sliced, diced and julienned.
The CPP has its doubters, though. For a full summary of their thoughts, check out a recent thread on the social media platform X that was initiated by portfolio manager Ben Felix. Mr. Felix is the chief investment officer at PWL Capital and has an interest in helping to educate people about money and markets.
In a calm and informational way, Mr. Felix addresses the many concerns people have about CPP. He explains that it’s financially healthy, which means it can be relied on when you plan for a retirement many years down the road. He points out that CPP assets are separate from federal government revenues and thus off limits to finance ministers scavenging for money. He also notes the CPP’s annual inflation adjustments, which help you maintain purchasing power in retirement.
A skeptical mind is a huge asset in managing your finances. Read more about the situations in which you should be a doubter here.
Sign up for the Carrick on Money personal finance newsletter here.
For tax-efficient wealth transfers, plan early and revisit often
Nothing is certain except death and taxes, says Jamie Sturgeon in this investing article. That immutable truth was first uttered by Benjamin Franklin, and is duly enforced by the Canada Revenue Agency (CRA). With upward of $1-trillion in assets passing between Canadian estates and beneficiaries this decade, the significant tax implications require careful planning.
Canada doesn’t have an inheritance or death tax, but that doesn’t mean there are no taxes due upon death. Here, the estate is taxed rather than the beneficiary. How assets are taxed depends greatly on the type of asset and to whom it’s bequeathed.
“We stress that once death occurs, there are dispositions and taxes owed,” says Tannis Dawson, high-net-worth planner with Napper Wealth Management Group at TD Wealth Private Investment Advice in Winnipeg.
For spouses, the law generally allows for the rolling over of assets on a tax-free basis. “On everything else, there’s a tax consequence,” Ms. Dawson notes.
That’s why it’s critical to create and review a wealth plan routinely that offers the best path to an efficient wind-up of the estate.
“The wealth plan is the best way to determine what tax consequences exist,” Ms. Dawson says.
Read the full article here.
For more from Globe Advisor, visit our homepage.
Retirement Q & A
Q: How does the government support newcomers to Canada who only start paying into CPP later in life, for example, in their 40s, because they’re immigrants? Can they access a pension from their other country before coming to Canada? What if there’s no pension there?
We asked Ngoc Day, a financial advisor with Macdonald Shymko & Co. Ltd. in Vancouver, to answer this one.
A: Canada doesn’t prohibit immigrants from receiving pensions from their countries of origin. Canada also has tax treaties with many countries to avoid double taxation of foreign pensions.
Once you start working and contributing to the CPP in Canada, you will accrue CPP credits. However, due to the reduced contributory period, you probably will not qualify for maximum CPP benefits.
In addition to CPP benefits, Canada provides additional retirement income via Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
Even though you may not contribute to CPP long enough to qualify for the maximum CPP benefit, you could qualify for a partial OAS benefit if you’re older than 65 and have lived in Canada for at least 10 years. As the maximum OAS benefit is based on living 40 years in Canada, partial OAS benefit is prorated on the number of years living in Canada divided by 40.
An immigrant 65 or older with low income may also be eligible for GIS benefits. Their spouse may also be eligible for the allowance between ages 60 to 64. GIS and allowance benefits are income-tested. A single retiree could be eligible for GIS if their income is below $21,624. You should contact Service Canada for eligibility.
Have a question about money or lifestyle topics for seniors? E-mail us at sixtyfive@globeandmail.com and we will find experts and answer your questions in future newsletters. Interested in more stories about retirement? Sixty Five aims to inspire Canadians to live their best lives, confidently and securely. Sign up for our weekly Retirement newsletter.
