Lewis and Liza.Tijana Martin/The Globe and Mail
At first blush, Lewis and Liza seem to be a typical professional couple pondering retirement. He’s age 60 and earns $135,000 a year working in financial services, she’s 58 and makes $92,000 a year in health care. They have one child, 25, and a house in suburban Toronto.
But Lewis is a formidable investor. Over the years, working as a consultant at times and an employee at others, Lewis has amassed a $2.9-million registered retirement savings plan bulging with U.S. tech stocks. He started with about $100,000, transferred from a retirement plan outside Canada to his RRSP when the family moved here.
In an e-mail, Lewis says he’s just an average “dumb investor who got a bit lucky.” His great good luck was to buy Apple, Amazon and Google years ago. “My three biggest holdings contributed to the biggest gains in the portfolio,” Lewis writes. His strategy has been to invest in the U.S. market, in “really solid tech stocks.”
With the family’s fortune secured, Lewis and Liza are looking for a financial plan for retirement. They want to hang up their hats soon with spending power of $9,000 a month after tax. About $400 a month of that will go to helping their families back home.
“What steps can we take to get adequate cash flow from age 60 to 70?” Lewis asks. They plan to defer Canada Pension Plan and Old Age Security to age 70. He also asks about withdrawing from their RRSPs/registered retirement income funds early and income-splitting strategies to lower taxes. They both have defined-benefit pension plans.
We asked Matthew Sears, a vice-president and financial planner at investment counsellor T.E. Wealth in Toronto, to look at Lewis and Liza’s situation.
What the expert says
Lewis and Liza’s goal of retiring in a year or so is easily achievable, Mr. Sears says. “They could even consider retiring at some point in 2022 if they chose to do so.” They would still leave a significant estate for their son, along with funds available for charitable contributions upon their deaths.
“Their maximum sustainable lifestyle expenses are $142,560 a year in 2021 dollars,” the planner says. This gives them a great deal of flexibility in terms of their spending, so that if they needed to assist family more than they already are, they can afford to do so, he adds.
In preparing his forecast, Mr. Sears assumes the couple retire in January, 2023, and live to be 95. Lewis gets 63 per cent of the maximum CPP benefit and Liza 58 per cent, starting at age 70. By deferring their benefits, they will get 42 per cent more than they would have if they had taken them at age 65. Their Old Age Security benefits are projected to be clawed back in full. He assumes an average annual rate of return on their investments of 5 per cent and an inflation rate of 2 per cent. They would contribute the maximum (currently $6,000 a year each) to their tax-free savings accounts for the rest of their lives.
At the beginning of retirement in 2023, their DB pension income won’t be enough to cover their cash-flow needs, Mr. Sears says. Lewis is entitled to a pension of $1,835 a month, not indexed to inflation, with a bridge benefit of $190 a month to age 65. Liza will get $2,270 a month, indexed, with a bridge benefit of $220 a month.
“They should consider drawing down some of their RRSP accounts to help fund this shortfall,” the planner says. “These initial years, they should both withdraw from their RRSP accounts to maintain similar tax brackets,” Mr. Sears says. (Lewis’s RRSP account is much larger than Liza’s, but until Lewis is 65 and converts his RRSP to a registered retirement income fund, or RRIF, his withdrawals won’t be eligible pension income to split.) When Lewis is 65, Liza can forgo withdrawing from her RRSP account and allow Lewis to draw the additional income they need from his RRSP/RRIF. They will make the pension split election on their tax returns.
In the first year of retirement, they’ll want to have about $73,000 of taxable income each to cover their expenses of $112,805, the planner says. For Lewis, $24,300 would be from his DB pension plan, and $48,770 from his RRSP account. For Liza, $29,880 would come from her DB pension and $43,220 from her RRSP. They could then use their non-registered taxable account to fund their TFSA contributions. They should continue to make the TFSA contributions and maximize the accounts throughout retirement, he says.
Alternatively, in these first years of retirement, they could withdraw some extra funds from Lewis’s RRSP each year to cover the TFSA contributions, Mr. Sears says. This would bring his taxable income to about $91,000 a year to cover the contributions. This is still significantly lower than what his income will be once he is required to begin drawing the mandatory minimum from his RRIF.
According to the projections, they will leave an estate of $3.3-million in investment assets plus their principal residence.
Client situation
The people: Lewis, 60; Liza, 58; and their son, 25
The problem: Nothing, really. Finding the best way to draw down savings while keeping taxes to a minimum.
The plan: Draw on their RRSPs/RRIFs as soon as they retire to supplement pension income. At age 65, Lewis can split his eligible pension income with Liza.
The payoff: A solid retirement plan
Monthly net income: $13,995
Assets: Bank account $4,000; house $1.5-million; cryptocurrency $45,000; his RRSP $2.9-million; her RRSP $355,000; non-registered stocks $153,000; his TFSA $55,000; her TFSA $62,000; estimated present value of his pension $313,010; estimated PV of her pension $503,805. Total: $5.89-million
Monthly outlays: Mortgage $2,835; property tax $580; water, sewer, garbage $170; home insurance $385; electricity, heat $240; maintenance, garden $135; transportation $1,100; groceries $600; clothing $125; line of credit $300; gifts, charity $60; vacation, travel $500; highway tolls $200; dining, drinks, entertainment $405; personal care $25; hobbies $10; subscriptions $40; family support $400; health care $180; communications $435; TFSAs $500; pension-plan contributions $480; group benefits $320. Total: $10,025
Liabilities: Mortgage $36,300; line of credit $3,500. Total: $39,800
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Some details may be changed to protect the privacy of the persons profiled.
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