Maxwell and Tara are in good health, so it makes sense for them to delay CPP and OAS until age 70.Glenn Lowson/The Globe and Mail
Although they retired a few years ago, Maxwell and Tara are sharpening their pencils and drawing up plans for their finances in the years to come. Maxwell is 64 and worked in credit while Tara is 63 and worked for a municipal government.
Tara has a defined benefit pension, indexed to inflation. Maxwell’s company offered a group registered retirement savings plan (RRSP).
First off, they wonder whether they can increase their spending from about $7,000 a month after tax to $10,000, and when they should start collecting Canada Pension Plan and Old Age Security benefits. They also face an increase in retirement home costs for an elderly parent.
“Our adviser wants us to start CPP right away and OAS at 65, but we are leaning toward deferring both as long as possible,” Maxwell writes in an e-mail. “Our nest-egg drawdown strategy needs to be reviewed, as well as our asset mix.”
In addition to Tara’s pension, their income consists of withdrawals from Maxwell’s registered retirement income fund (RRIF) and his life income fund, interest and dividends from their non-registered investment portfolio, withdrawals from Tara’s RRIF and a monthly draw from their portfolio to cover their share of the retirement home rent.
“We were very careful and frugal during our active working years,” Maxwell writes. Now they would like to “loosen the purse strings” enough to travel more and make some improvements to their southern Ontario house. “We have no children so leaving a legacy is not a high priority,” Maxwell adds. They plan “significant gifts” to charity and are “heavily involved in community volunteer pursuits.”
We asked Warren MacKenzie, a fee-only certified financial planner (CFP) in Toronto, to look at Maxwell and Tara’s situation. Mr. MacKenzie also holds the chartered professional accountant (CPA) designation.
What the Expert Says
Maxwell and Tara are in good health and believe they might live to age 95, Mr. MacKenzie says. “They exercise and eat well” so it makes sense for them to delay CPP and OAS until age 70, he says. By so doing, their CPP benefits will be higher by 42 per cent and OAS by 36 per cent.
“Ignoring adjustments for inflation, when they’re both age 70, their total pension income will consist of Tara’s indexed defined benefit pension of $58,196 a year, combined CPP of $32,058 and OAS of $22,554, for a total of $112,808,” the planner says.
As for the higher retirement home bill for the elderly parent, it should have no impact on the couple’s ability to meet their spending target, he says.
To maintain their higher level of spending, they will dip into their capital, the planner says. But assuming the value of their house continues to increase with inflation, their net worth will continue to increase as well.
“Over their working years they saved money in both their registered and non-registered accounts so that they would have capital to spend in retirement,” the planner says. Now, based on reasonable assumptions, by using up their non-registered capital – as they intend to do – they can achieve their spending goals even if they had no money in their RRIF accounts, he says. “If they wanted to, they could withdraw and give away all the funds in their RRIF accounts.”
They are not concerned about the possibility of one or both of them needing nursing home care because if that happens they’d sell their house to cover the cost.
Maxwell and Tara say they want to be involved in their community and support local charities. They also want to leave some money to their niece and nephew and to a hospital.
To compare how giving more to charity compares financially with leaving a larger bequest to relatives, the couple are considering two alternatives, a charity plan and a family legacy plan.
“In the charity plan, 100 per cent of the withdrawals from their RRIFs are donated to charity, and so are deducted for income tax purposes in the year in which they are received,” Mr. MacKenzie says. Effectively, in the charity plan the tax on the RRIF withdrawals is offset by the charitable deductions of the same amount.
In the family legacy plan, as RRIF withdrawals are received by Maxwell and Tara, there is no offsetting deduction. They invest the net after-tax amount in their non-registered investment portfolio.
“Assuming they make it to age 95, over the next 30 years, in the charity plan, different charities could receive almost $2-million and the relatives $3-million,” Mr. MacKenzie says. In the family legacy plan, where only 10 per cent of the estate goes to charity, the charities get about $600,000 when the estate is wound up. The relatives would get about $5.5-million.
“In the charity plan, because of the higher charitable deductions, the total income tax paid over the rest of their lives is about $650,000 versus about $1,100,000 in the family legacy plan.”
The total amount distributed is larger under the family legacy plan because the money retained by the estate is assumed to compound at the rate of 5 per cent a year over 35 years. The compounding is more than enough to offset the higher income tax paid.
If they choose the family legacy plan, in the years before they start to draw CPP, the cash needed to make up the difference between Tara’s pension and the desired level of spending should be covered by RRIF withdrawals, the planner says. In both plans, pension income and RRIF income should be split equally for tax purposes. As well, Maxwell and Tara should continue to make the maximum contributions to their tax-free savings accounts (TFSAs) by using funds from their non-registered investment portfolio.
In the charity plan they would cover their cash flow shortfall by using non-registered investments, he says. They will split the income for tax purposes. Their only income (in the years before they start to draw CPP and OAS) will be Tara’s pension of about $58,000 a year and about $15,000 of investment income from their joint account. They each have medical costs, so after all deductions, in the first year of the charity plan, their combined tax bill would be about $5,000.
Of course Maxwell and Tara don’t have to choose one over the other.
“There is no need to make a lifetime commitment to either the family legacy or charity strategy,” Mr. MacKenzie says. “To maintain flexibility, each year they should pursue whichever strategy feels right at that time.” Even if they are generous with local charities, they will still leave a significant estate to family members, the planner notes.
Their financial adviser is with a major Canadian bank and almost 100 per cent of their investments are in individual securities and a market-timing fund. The fund is well-diversified with fixed income, equities and alternative investments. Their adviser says that over a 10-year period, their account has delivered an annualized return of 5.5 per cent, compared with a benchmark of 4.7 per cent.
Even so, because their focus should be on capital preservation, they should set a target asset mix of stocks, bonds and cash based on their goals and risk tolerance and rebalance regularly, Mr. MacKenzie says.
Client Situation
The People: Maxwell, 64, and Tara, 63.
The Problem: Can they afford to loosen the purse strings without jeopardizing their financial security? When should they draw government benefits?
The Plan: Postpone CPP and OAS to age 70. Consider donating funds from their RRIFs.
The Payoff: Putting some of their hard-earned capital to good use by giving to charity, taking comfort from knowing they have more than enough to meet all their financial goals.
Monthly net income: $6,950.
Assets: Joint bank accounts $80,000; non-registered portfolio $578,000; his TFSA $135,000; her TFSA $137,000; his RRSP $634,000; her RRSP $176,000; residence $1,160,000. Total: $2.9-million.
Estimated present value of Tara’s DB pension: $1.2-million. That’s what someone with no pension would have to save to generate the same cash flow.
Monthly outlays: Property tax $520; water, sewer, garbage $80; home insurance $160; electricity $100; heating $90; maintenance, improvements $1,000; garden $100; transportation $495; groceries $800; clothing $100; gifts, charity $300; vacation, travel $1,000; share of parent’s retirement home $700; dining, drinks, entertainment $650; personal care $80; club memberships $160; sports, hobbies $50; subscriptions $40; other personal $20; drugstore, health food store $70; phones, TV, internet $450. Total: $6,965.
Liabilities: None.
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