Simon and Wanda are well-positioned for retirement, with almost $4-million in assets in addition to their condo and country home.Christopher Katsarov/The Globe and Mail
Simon and Wanda have reached a turning point in their lives, from striving to save to enjoying the fruits of their labour. Simon is 60, Wanda 58. Their children, 19 and 21, are away at university.
Recently, the couple traded the family house for a condo in the city and a home in the country – with some money left over. Some of that surplus, along with their RESP savings, will go to pay their children’s tuition for the next four years.
Simon and Wanda run a successful IT business that they are thinking of selling at some point. They’re hoping to get $1.3-million. They’re loosely planning to retire in 2031, with a retirement budget of $140,000 a year after taxes.
In addition to the money from the sale of the house, they have tax-free savings accounts, good-sized registered retirement savings plans and roughly $200,000 in cash within their business. They have another $930,000 in cash and investments in their holding company.
They’d like to give $250,000 to each of their children for a down payment on a home when they finish school. “What’s the best way to give them that amount?” Simon asks. “Can we give them tax-free gifts? Do we gift them out of the money left over from the house sale?”
They are also wondering how to invest the proceeds when they sell the company.
We asked Jason Heath, an advice-only financial planner at Objective Financial Partners in Toronto, to look at Simon and Wanda’s situation.
What the Expert Says
Simon and Wanda are well-positioned for retirement, with almost $4-million in assets in addition to their condo and country home, Mr. Heath says.
“Assuming they continue to work until 2031 and they sell their company for an anticipated $1.3-million, I think they could probably afford to spend about $190,000 per year, indexed to inflation, until age 95,” the planner says. This assumes 2-per-cent annual inflation, 4-per-cent annual investment returns and no further real estate sales.
“On that basis, it seems they can gift their kids $250,000 each to use toward a home down payment without compromising their retirement,” Mr. Heath says. Indeed, they may be in a position to consider additional gifts to their children at intervals over time.
Canada does not tax gifts, the planner notes. “As long as they are not selling investments for a profit to make a gift or withdrawing from tax-sheltered accounts or their corporations, there are no tax implications.”
Wanda and Simon have some non-registered and TFSA savings that are easily accessible to fund these gifts and would have more if they were to sell their business.
“Frankly, I think Simon and Wanda could retire long before 2031,” Mr. Heath says.
The couple’s budgeted living expenses – excluding monthly savings – are only about $63,000 a year, the planner notes. They are targeting $140,000 of after-tax income in retirement. This represents a significant increase in their spending.
“Business owners like Simon and Wanda may need to consider expenses being paid corporately – like cellphones, car payments or meals and entertainment – that will become personal expenses in retirement,” the planner says. There are also car replacements, renovations and repairs on their two properties. So perhaps their retirement budget is anticipating some of these incremental costs.
From an investment perspective, they will probably be able to maintain their TFSAs throughout their lives once their business is sold, so they could consider a more aggressive asset allocation in these accounts, the planner says. “Their non-registered investments, which will balloon from the business sale, combined with their RRSPs, should be able to fund withdrawals with a mix of income and some capital withdrawals.”
They should also consider paying strategic dividends to themselves from their holding company in retirement, he says. They may not ultimately need to take corporate withdrawals, as their personal assets and government pensions may be sufficient to cover their spending. But retirees with corporate assets may be able to pay less combined personal and corporate tax, or increase their after-tax estate value, by taking some corporate withdrawals in the form of dividends, depending on their tax rates.
Their investments are projected to peak at about $4.5-million at retirement and will still be in the same range by the time they are 95, the planner says. So they are mostly living off investment income and pensions without much capital depletion.
On that basis, they don’t need to earn a high rate of return to achieve their goals. Their initial withdrawal rate might only be about 3 per cent of their investments. They may be able to achieve that with interest and dividends.
Simon and Wanda are planning to start Old Age Security benefits at 65 but are uncertain about when to take Canada Pension Plan benefits.
“If they are still working at 65, their incomes may be so high that their OAS will be clawed back unless they reduce their salaries,” Mr. Heath says. OAS is a means-tested pension that is reduced at higher incomes.
They may want to consider deferring their OAS and CPP until they fully retire, potentially starting both as late as age 70, the planner says. “If they are in good health, they may receive fewer months of payments by waiting until age 70, but each monthly payment will be higher than if they started earlier. They can expect to break even in their mid-80s.”
If they decide to sell their business, Simon and Wanda are wondering where to invest the proceeds – personally or in a corporation. “Their company may qualify for the lifetime capital gains exemption, and that could make a share sale of their business tax-free to them personally,” Mr. Heath says. The capital gains exemption allows a capital gain on the sale of small-business corporation shares of up to $971,190 per taxpayer to be tax-free ($1-million for a farming or fishing property). “If the buyer of their business buys the assets, they may end up receiving the proceeds corporately and likely investing the funds with their corporation.”
Simon and Wanda have no wills, so that should be a priority for them, the planner says. “They have a pretty large estate, so they should consider whether they would want it all to go to their kids or whether there are other family members, friends or charities they might like to benefit.”
Given their significant corporate assets, they may want to draft primary and secondary wills, Mr. Heath says. Although most people have just one will, you can have multiple wills to deal with different types of assets. The secondary wills would deal with assets like their private company shares, which can avoid Ontario probate fees if dealt with under a separate will.
Client Situation
The People: Simon, 60, Wanda, 58, and their two children, 19 and 21.
The Problem: Can they afford to give their children money for down payments and will it be taxable? If they sell their business, how and where should they invest the proceeds?
The Plan: Give the children surplus money from the house sale or from TFSAs. If they sell the business, they can invest conservatively because they don’t need a high rate of return to achieve their goals. Consider taking corporate dividends.
The Payoff: Understanding that they should be able to achieve their financial goals and more.
Monthly net income: $14,695.
Assets: His TFSA $90,000; her TFSA $69,000; his RRSP $600,000; her RRSP $840,000; country home $750,000; city home $750,000; cash in operating company $200,000; estimated market value of operating company $1,260,000; cash in holding company $700,000; holding company investment portfolio $230,000; children’s registered education savings plan $50,000. Total: $5,539,000
Monthly outlays: Condo fees $1,400; property taxes $625; water, sewer, garbage $60; home insurance $150; electricity $75; heating $90; maintenance $250; garden $75; transportation $515; groceries $700; clothing $300; line of credit $250; gifts, charity $500; vacation, travel $750; dining, drinks, entertainment $525; personal care $75; club memberships $75; pets $125; sports, hobbies $150; doctors, dentists $150; drugstore $50; RRSPs $3,335; TFSAs $1,000. Total: $11,225.
Liabilities: Line of credit $105,000.
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Some details may be changed to protect the privacy of the persons profiled.
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