After years of working 'crazy hours' and with solid savings, Al and his wife Kate have a mortgage-free house in the Greater Toronto Area and a son who is back living at home after finishing a two-year contract abroad.Christopher Katsarov/The Globe and Mail
“I came to Canada 27 years ago and started working right away,” Al writes in an e-mail. He’s done well, earning $230,000 a year in a high-demand technical field.
After years of working “crazy hours” and with solid savings, he wants to slow down and perhaps work part-time if he can. “My conservative planning should consider the possibility of not being able to do so,” Al adds. “In my field you are either 100 per cent in or 100 per cent out.”
Al is 61 years old, his wife Kate is 57. They have a mortgage-free house in the Greater Toronto Area and a son, 24, who is back living at home after finishing a two-year contract abroad.
“Eventually it’s in our plan to get a smaller house somewhere up north, hopefully close to a lake or river,” Al writes. Their retirement spending goal is at least $84,000 a year after tax, in line with their current lifestyle spending. “If we can increase it, say to $96,000 or $120,000 a year after tax, that would be much better.”
They also want to leave a comfortable estate for their son.
How much can they afford to spend if Al retires at year end?
We asked Warren MacKenzie, an independent certified financial planner based in Toronto, to look at Al and Kate’s situation. Mr. MacKenzie also holds the chartered professional accountant designation.
What the Expert Says
Al’s initial question is whether he can retire at the end of the year and maintain the desired $84,000-a-year lifestyle, Mr. MacKenzie says. “The answer to that question is yes, based on reasonable assumptions, he can retire and they will never run out of money,” the planner says.
The forecast assumes a 5-per-cent average return on investments, 2-per-cent average inflation, and living to the age of 100. At $84,000 a year they’d be leaving an estate of nearly $3-million in dollars with today’s purchasing power, the planner says. If they chose to, they could spend $130,000 a year and still leave an estate of about $1-million.
In a questionnaire they filled out for the planner, the couple said an important goal was to leave the largest estate possible. The goals of leaving a large estate and spending more in retirement would appear to be in conflict, the planner says. “Clarifying one’s goals is the single most important step in the financial and estate planning process.”
If they really want to leave a larger estate, they should consider using some of their non-registered funds to purchase a whole life, joint and last-to-die insurance policy, he says. This strategy provides a guaranteed return and saves income taxes and probate fees because life-insurance proceeds are non-taxable and go directly to the beneficiary.
Al and Kate may want to give their son an “advance inheritance” while he is still young and needs the money, Mr. MacKenzie says. There are several advantages to giving inheritance advances. “Doing so will reduce the capital and therefore taxable income of the parents,” the planner says. As well, advance inheritances can provide heirs with the opportunity to learn about investing and make their mistakes with smaller sums of money.
Al and Kate have more than $400,000 in non-registered funds on which they are earning taxable income, the planner notes. “As a minimum, over the next five years, they should plan to give their son $40,000 to open a First Home Savings Account.”
As to when to apply for Canada Pension Plan and Old Age Security benefits, if Al and his wife are in good health and expect to live well into their 80s, they should delay starting OAS and CPP until the age of 70. “Kate is a homemaker and has never contributed to CPP, so while she will be entitled to some OAS, she will not be entitled to any CPP.”
By delaying benefits until the age of 70, the CPP benefits will be 42 per cent higher and OAS 36 per cent higher than if they started at the age of 65. If they have liquid assets to cover expenses, and expect to live beyond the age of 82, it makes sense to delay benefits until the age of 70, the planner says. Because they have not lived in Canada for 40 years after the age of 18, they will not qualify for full OAS.
Assuming Al does not work part-time and delays starting CPP and OAS until the age of 70, he will have almost no taxable income in 2025. “In this case, for the years until age 65, they should fund their lifestyle needs by withdrawing $50,000 each year from Al’s RRSP, $10,000 from Kate’s RRSP, and $15,000 each, or $30,000, from their guaranteed investment certificates,” the planner says.
Given that Kate will pay nothing in income tax and Al will pay about $6,000 on his taxable income, this will be sufficient to cover their basic expenses. If there are unexpected expenses any shortfall will be covered from their bank account.
After Al turns 65, he can split income from his registered retirement income fund with Kate. For the years before they draw CPP and OAS at the age of 70, Al can take $100,000 each year from his RRIF. After splitting with Kate, this will be sufficient to cover lifestyle needs and income tax.
They should continue to maximize contributions to their TFSAs.
Al is a do-it-yourself investor and manages the investments for the family. The overall asset mix is about 60-per-cent equities and 40-per-cent fixed income. More than $800,000 of their RRSP funds are invested in one balanced mutual fund that has outperformed the appropriate benchmark. Over the past 10 years their investment portfolio has averaged a return of just over 7 per cent per annum, Mr. MacKenzie says. The 60/40 asset mix is reasonable but they would have greater tax efficiency if most of their fixed income securities were in their RRSPs and a greater portion of the capital-gains-producing investments in their non-registered and TSFA accounts.
Within the next 10 years Al and Kate plan to sell their house and purchase a smaller one in a less expensive community outside of the Toronto area. When this happens they will have an additional $1-million of non-RRSP funds, the planner says. Even if they both one day require nursing care costing $7,500 a month each, they will never run out of money, he says.
Client Situation
The People: Al, 61, Kate, 57, and their son, 24.
The Problem: If Al retires at year end, can they afford to spend more than they do now and still leave a sizeable inheritance?
The Plan: Draw from Al’s RRSP/RRIF in early retirement years. Split income with Kate as soon as he can. Consider giving advance inheritances to their son.
The Payoff: A solid understanding of the tradeoffs between living comfortably now and leaving a large estate.
Monthly net income: $13,000.
Assets: Cash $55,000; GICs $120,000; non-registered portfolio $250,000; his TFSA $165,000; her TFSA $120,000; his RRSP $1,050,000; her spousal RRSP $50,000; residence $2,000,000. Total: $3.8-million.
Monthly outlays: Property tax $750; water, sewer, garbage $110; home insurance $120; electricity $230; heating $180; security $55; maintenance $300; car insurance $430; fuel, oil $420; groceries $1,100; clothing $250; gifts, charity $200; vacation, travel $600; dining, drinks, entertainment $1,050; personal care $350; club memberships $120; sports, hobbies $140; subscriptions $60; health care $300; phones, TV, internet $280. Total: $7,045.
Liabilities: None.
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