Christopher Katsarov/The Globe and Mail
Of all the readers who have approached Financial Facelift, Ned is perhaps the most knowledgeable about the ins and outs of saving and investing. While both he and his wife Nancy are professionals, they do not work in financial services.
Ned is 62, Nancy is 54. Together they bring in about $199,230 a year in employment income. They have two adult children, also professionals, both of whom live at home and help with the expenses.
“Over the past 37 years, we have lived and worked in many parts of the world before migrating to Canada,” Ned writes in an e-mail. “I am an ardent personal finance scholar who loves reading books, journals and blogs on the subject, as well as being very comfortable working with software focused on business, investing and taxes,” he writes.
A do-it-yourself investor, Ned has been gradually reducing risk in their investment portfolio, cashing out of their growth shares late in 2019.
Although Ned’s calculations show the family is well-fixed financially, “I am worried that there has been no third-party review and I may have missed something,” he writes.
Can they retire as planned, Ned in 2021 and Nancy in 2024, without downsizing their house? Will they be able to leave a substantial inheritance for their children “or will we just have enough to get through?” Their retirement spending target is $63,000 a year after tax.
We asked Ian Calvert, portfolio manager and certified financial planner at HighView Financial Group in Toronto, to look at Ned and Nancy’s situation.
What the expert says
Ned and Nancy have a net worth of $2.2-million, split evenly between their house and their investable assets in their registered retirement savings plans, tax-free savings accounts and non-registered taxable accounts.
Still, they face some retirement challenges. They have no pension plans at work and will not be entitled to receive the full Canada Pension Plan retirement benefit based on their years of contribution.
Ned plans to retire in May, 2021, at the age of 63, with taxable income consisting only of investment income from their joint portfolio. He plans to begin collecting CPP and Old Age Security benefits at the age of 65.
“Ned will experience a significant change in his total income and marginal tax bracket, which he needs to take advantage of,” Mr. Calvert says. Instead of drawing entirely from their non-registered portfolio, he should begin drawing down his RRSP assets early when his income from other sources is low.
If Ned converted his RRSP to a registered retirement income fund (RRIF) at age 63, based on his age his minimum withdrawal would be about $16,500 a year. Nancy would still be working.
When Ned turns 65, his income will break down as follows: OAS $8,000 a year, CPP $6,000, investment income from non-registered account $6,500 and RRIF withdrawal $16,500, for a total of $37,000 a year. At this income level, Ned would be in the lowest combined (federal and provincial) tax bracket of 20.05 per cent.
Nancy should also implement an early RRSP conversion, but not until 2026, the first year she will not be reporting any employment income, Mr. Calvert says. Her RRIF minimum withdrawal would be about $6,000, also leaving her in the lowest combined tax bracket.
“Looking out to 2031, when they are both drawing CPP and OAS, if they decided to take only the minimum from their RRIFs, they would need about $35,000 a year from their joint (non-registered) account to meet their lifestyle needs,” the planner says. The number is indexed to inflation and includes annual contributions of $12,000 to their TFSAs. “This withdrawal rate from their joint account would deplete these non-registered assets by 2037, when they are 79 and 71,” the planner says.
Instead, they could take more than the minimum from their RRIFs during their years of low taxable income, when they first retire, he says.
As long as they each keep their total taxable income from all sources below $44,740 a year, they could withdraw more than the minimum and still remain in the lowest combined federal and provincial tax bracket, the planner says. By drawing on their registered savings first, they would preserve their joint taxable portfolio longer than 2037. Having the non-registered portfolio last longer would “provide some additional flexibility to make a larger withdrawal without the full amount being taxed as income – as it would be from a RRIF – if something unexpected happens,” he says.
This would also be beneficial for the transition of wealth to their two children. If they follow the withdrawal plan of using their RRSP/RRIF early in their retirement years, they will draw down these accounts throughout their lives, which will reduce the taxes on their final returns. In most cases, the assets remaining in a RRSP/RRIF on the death of the second spouse will be taxed in a lump sum on the final tax return.
Based on this withdrawal plan, at the ages of 90 and 82, they would have a net worth of $2.9-million – $1.8-million their house and $1.1-million remaining in their investment portfolio – of which $950,000 would be held in their TFSAs, Mr. Calvert says.
This assumes they use their RRSPs and non-registered portfolio before touching the TFSAs, continue to contribute $6,000 a year each to their TFSAs and earn a 4 per cent rate of return.
“In the long run, the family assets would consist of their principal residence, which for the time being does not attract any capital gains tax, and their TFSAs, leaving very little tax on the transition of wealth to the next generation,” he says.
With an assumed 4 per cent rate of return on their investment portfolio, Ned and Nancy should be able to comfortably meet their after-tax spending target of $63,000 a year without being forced to sell or touch the equity in their house, Mr. Calvert says.
Ned and Nancy have started reducing their equity exposure, which is now about 55 per cent. If they reduce it any further, though, they may find it difficult to meet their target return, the planner says. With interest rates so low, they need the dividend income and potential growth provided by equities.
Their investments also have a heavy home-country bias, with 65 per cent of their exchange-traded funds in Canadian stocks.
“As the Canadian market is nearly 30 per cent exposed to energy and material stocks, reducing Canadian stock exposure in favour of global equities will help diversify the portfolio and gain exposure to other sectors with more reliable dividends.”
Client situation
The people: Ned, 62, Nancy, 54, and their two children, 29 and 24
The problem: Can they meet their retirement spending target without having to downsize? Can they leave an inheritance for their children?
The plan: Draw down RRSP/RRIF holdings early in retirement. Try to preserve non-registered assets for later in life. Continue contributing to TFSAs. Diversify their stock holdings internationally.
The payoff: The rewards of a life of hard work and informed investing.
Monthly net income: $13,000
Assets: Bank accounts $102,000; fixed income $134,000; stocks and stock ETFs $200,000; his TFSA $140,000; her TFSA $106,000; his RRSP $373,000; her RRSP $116,000; residence $1.05-million Total: $2.2-million
Monthly outlays: Property tax $350; home insurance $100; utilities $345; maintenance, garden $210; transportation $565; groceries $800; clothing $250; gifts, charity $325; vacation, travel $500; other discretionary $150; dining, drinks, entertainment $370; grooming $60; club memberships $100; pets $250; subscriptions $50; other personal $150; health care $180; heath insurance $100; life insurance $125; phones, TV, internet $300; RRSPs $2,500; TFSAs $1,000. Total: $8,780.Surplus goes to saving and investing.
Liabilities: None
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Some details may be changed to protect the privacy of the persons profiled.
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