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Decisions, decisions. Planning for a stress-free retirement

Retirement is a time of great excitement and the beginning of a new stage of life. As with any big life change, there is also an element of concern, as people become overwhelmed with the decisions they must make.

  • How will they spend their time?
  • How much will that cost?
  • What sources of income are available to them?
  • When is the best time to begin accessing that income?

These questions can be daunting, and to prepare for this new stage of life, it’s important to understand the various options, and make informed choices. Let’s look at an example.

Meet Jim and Sue Smith

Jim and Sue Smith are a married couple with three adult children. Jim is 65, and retired last year.  Sue is 59, and retired last month. They are both Canadian citizens and qualify for full OAS benefits of $578.53 (since Sue is only 59, she cannot begin to collect OAS prior to age 65).  Jim will receive maximum CPP retirement pension of $1,114.17 per month, and Sue will receive about 70% of the maximum benefit, when she decides to begin receiving payments.

Sue has a defined benefit pension plan through her employer and a spousal RRSP worth $225,000. Jim has a locked-in RRSP worth about $750,000 and a personal RRSP, valued at about $350,000. Jim also has a $500,000 non-registered account in his name only, resulting in additional investment income allocated to Jim. They have maximized their TFSAs, and own a home worth $600,000. They have about $2,000,000 in total assets and spend about $70,000 per year. Being somewhat conservative investors, they estimate returns of 4% net of fees.

Related Article: Ten Ideas to Successful and Happy Retirement

What are Jim and Sue’s Concerns?

Jim and Sue are concerned with tax efficiency and the risk of outliving their money. They both have family histories of longevity. Jim and Sue would also like to have some funds available for their grandchildren upon their passing. In a year, they are moving to another province to be closer to their children and grandchildren. They are considering whether to buy another home of equal value or rent an apartment. They would like to compare the financial outcomes of these two options.

Making Informed Decisions

Upon reviewing their situation, Jim will convert his RRSP and locked-in RRSP into a RRIF and an LRIF, with payments beginning in the New Year. By converting these accounts now, as opposed to at age 71, he should avoid OAS clawback now and throughout the rest of his life, and will benefit from the $2,000 pension income amount tax credit. He is splitting his income from his RRIF and his LRIF with Sue.

Sue’s only source of income is her employer pension with annual payments of $16,000 (non-indexed), so allocating some of his income to her to reduce the family tax bill makes good sense.

To maximize tax efficiency, Sue will convert her RRSP to a RRIF at age 65. She will not split her pension or RRIF income with Jim. Keep in mind that he has the additional investment income from the non-registered account in his name. She will also remain under the OAS income threshold.

OAS benefits begin to be clawed back when net annual income before adjustments reaches $74,789.  Income in excess of this amount results in a 15 cent per dollar reduction in OAS benefits. For example, if Jim earned $100,000 of net income while receiving OAS, he would be subject to a clawback of $3,781.65.  This is calculated as follows:  ($100,000-$74,789) x 15%.  This amount would be deducted from the maximum benefit of $6,942.36.  His total OAS benefit would be $3,160.71. Not everyone qualifies for the maximum OAS benefit. There is a residency requirement in place.

Deferring CPP or OAS pension start dates beyond the standard age of 65 may have merits for Jim and Sue. The couple will consider deferring these pensions in particular for Sue, as she gets closer to age 65.

Income sources (CPP, OAS, employer pensions, and minimum RRIF withdrawals) will be sufficient to fund their lifestyle without reducing  investment capital for the remainder of their lives.

Jim and Sue will benefit from the tax advantages of a TFSA by maximizing deposits for life. There is sufficient cash flow and non-registered assets to accomplish this.

We agreed that Jim will add Sue’s name to his non-registered investment account with rights of survivorship.  Due to attribution rules, Jim will still be responsible for the taxes payable on the account, but this action will assist with ease of access to the funds should he become disabled or die. Probate fees on the account would be avoided on Jim’s death.

Related Article: Maximizing Your Income in Retirement

Sell the Home and Rent, or Buy Another Home?

As previously mentioned, Jim and Sue will be moving to another province next year. If they decide to sell their home and rent, they assume that annual expenses would rise by about $30,000 annually. Proceeds of the home will be deposited into a joint non-registered account, since both contributed equally to the home.

Upon comparing the two scenarios, if Jim and Sue rent, their net worth will be about 55% of what it would be if they continued to own, should they live into their mid-90’s. This is a result of losing the principal residence tax exemption, higher annual expenses, and a larger non-registered portfolio generating taxable investment income. There are instances where selling a home and renting makes good financial sense.  It depends on the specifics of each situation, so it is important to compare the financial outcome in all cases.

To reduce the negative impact on their estate value, consideration may be given to renting later in life, perhaps in their late 70’s or early 80’s, when it becomes more difficult to maintain the upkeep of the home. Depending on health, they may opt for a retirement home over a rental condo – and assets seem sufficient to fund an increase in expenses from long-term care costs.

Final Thoughts

Jim and Sue are well-positioned for retirement. They made sound financial choices in their earning years. Even if returns were only 2%, they would be able to maintain their current lifestyle.  With returns projected at 4%, if they chose to deplete their liquid assets, spending could be increased by over $42,000 annually.

The decision to begin renting immediately would have the most significant impact on their estate value if their estimated budget for a rental is, in fact, accurate. Jim and Sue will need to determine if letting go of the responsibilities of home ownership in the short term is more important to them than the preservation of their estate.

Written by Brenda Hiscock

Brenda is one Canada’s approximately 150 advice-only, fee-only Certified Financial Planners (CFPs). She does not sell any products or receive any referral fees. She has a particular interest in working with clients and their advisers and in financial education for employees but works with single people, seniors and families at all planning stages seeking to take control of their financial lives. Brenda is a Certified Financial Planner at Objective Financial Partners in Toronto and works via Skype with clients across Canada.

22 Responses to Decisions, decisions. Planning for a stress-free retirement

  1. If I were this couple I’d stick to the 2% and maintain their lifestyle. You never know what the markets could do in the future. Better safe then broke at their stage of the game!

    • Thank you for your comment. Many people do opt to plan for 2%, while others set their sights a little higher. It’s important for people to know how things will turn out in various scenarios.

  2. Very useful information.

    I guess it goes without saying that Jim:

    1. Would use his (younger) wife’s age in the formula for calculating his minimum withdrawals from LIF and RRIF.

    2. May want to “unlock” up to 50% of his locked-in account – putting that into a RRIF instead of a LIF. Although the minimum withdrawal rate would be the same, there is no max on RRIF which gives a little flexibility in case of emergency.

    • Thank you for your comments Fred. Yes, that is a good point that John could use his wife’s age to calculate his RRIF amounts.

      Unfortunately, the 50% unlocking rule does not apply in all jurisdictions. I’m glad you found the information helpful.

      Brenda

  3. Brenda,

    One topic you mentioned, “What sources of income are available to them?” is not really covered.

    Be patient, my comment is long today. ☺

    Always consider CPP, OAS & GIS as safety nets or emergency funds. Never, never include them in your plans to build a Personal Retirement Plan that focuses on income rather than on capital.

    When I retired, I had enough capital for about 7 years. I retired because I couldn’t find a new job that was full-time and paid more than minimum wage. I was 56, single, not a penny in any kind of debt.

    I was poor. Paid no income tax, free MSP (BC health care), free prescriptions and chiropractor: free means subsidized.

    No income per se.

    I did have a computer, an Internet connection, could navigate a spreadsheet.

    I desperately needed income. I focused on generating a minimum wage income.

    Surprisingly, with such a narrow investment focus, this desperation was abated in about 6 months. And it was better than a job because I had no expenses such as travelling to work.

    Since then, my OAS was clawed back, once, because my income was too high.

    It is easy to do with today’s discount brokerages with Margin accounts, an Internet connection and a plethora of free investment and investment tools websites; there are even a few fee-based advice websites.

    I could not have done what I did 20 years ago because the digital tools weren’t there and neither were a few new income-targeting money managers who don’t require clients with large amounts of cash, usually $500,000.

    I often use this analogy to define the levels of investment skills and aptitude: if you can feed yourself – sandwiches, bacon & eggs, spaghetti sauces or simple stews, you can invest for yourself. Do you hire a chef to feed yourself? Do you eat every meal at a restaurant? Have you never been to a grocery store? Do you not know what vegetables are?

    Most people answer no, and many are fat! ☺

    The Google Finance and TMXMONEY websites have stock filters to help anyone find investment vehicles that pay some form of dividend.

    What to look for? I’ll give you a choice: investments that pay the highest distributions (tax-advantaged dividends, tax-expensive interest, capital gains, return-of-capital), or those that pay the lowest.

    Can you feed yourself?

    When I started I spent 30+ hours a week, at least. Today I choose to monitor my portfolio which may take a maximum of 20 hours a month; this keeps me abreast of changes or new products to buy and benefit from.

    Now I pay a little bit of income tax (the most I’ve paid is 8% of my taxable income), I pay all my MSP premiums, all my prescriptions and chiropractors, and I now go to the dentist. My kids and grandkids get some money. I go on trips; but the habit of monitoring my portfolio is such a routine that I consult the web even on trips – such a drag ☺.

    I also have time for some volunteering, preparing most of my meals, planning for the next trip, taking naps.

    My primary advice at any age is to explore and educate yourself about investing; for younger people, start with 1 hour a week (instead of one of the Housewives TV show) and don’t give up. The time you’ll spend learning about the tools and the products is exactly the same amount of time you’ll spend knowing an advisor, possible more than one.

    Understand RISK, a four-letter word to the uninitiated. Understand the rule of 72. Define what you need in income (today’s dollar, combined with inflation and the rule of 72) rather than what you want.

    Stop concentrating your efforts on accumulating millions of dollars in a retirement fund – most of us just cannot achieve that. Learn about Margin accounts, tax-expensive income (CPP, OAS, GIS, interest, RRSPs), income-centric funds and stocks, tax-advantaged income. Ignore CPP, OAS & GIS as a pension plan: they are definitely not, they are only pension safety nets that are income tax expensive.

    What motivation can you invoke? How about mo’ money, mo’ money, mo’ money in your pocket and mo’ freedom, mo’ freedom, mo’ freedom.

  4. Good article. Sounds like Jim and Sue had no issue making the small “sacrifices” during their working careers to end up with a very comfortable retirement. Too bad more Canadians in their situation aren’t following the same practice. Hopefully this is a wake up call for those that SHOULD be able to do the same thing but have chosen not to. You know the old saying…If this helps just one couple rethink their current readiness and change their savings/investment habits then the article was well worth the effort writing.

    I consider myself fairly financially literate but I find most if not all of the articles in this blog very enlightening. There is usually a little jewel in every article. For example as some of my/our RRSPs are in laddered GICs. Our plan was to just start collecting retirement income by cashing out the GICs as they mature. That way we would not be handcuffed with min/max rules until we reached the ripe old age of 71 when we would be forced to convert any funds still remaining in a RRSP. Time for us to do a little more research I guess 🙂

    On another note. I through both parties needed to be 65 in order to split pension income generated from a RRSP/RRIF/LRIF, or does that only apply to CPP? My understanding re: CPP income splitting is that BOTH parties MUST participate and unlike with other pension income splitting it will only be at 50/50.

    • Thank you for your comments Mark. Pension income LIF, RRIF, LRIF, and company pension funds can be split as long as the person receiving the pension is 65. The spouse receiving the split income does not have to be 65. CPP splitting is a different matter, and not covered in this article.

  5. Once again, as in many similar retirement “hardships” that are stated on the Financial Post, 2 MILLION in assets, as well as pension incomes puts this couple way up the ladder compared to the average Canadian retirement couple. Let’s try some real stories with average stats. How about a couple approaching 60, with no investment income, no non registered investments, a modest RRSP portfolio. Mortgage is paid. Children self sufficient. And the couple will both receive maximum CPP benefits. According to Fred Vettese, it can still be done. Maybe work a few years more. Maybe part time. But TWO MILLION? Come on! The 1% will be fine!!

      • I agree.
        Many of us ‘average’ Canadians read these articles and are filled with despair.

        I am one of the many divorced women who started over late in life after raising kids, went back to full time work and maintained a home while getting kids off to university. I am now looking to managing a BASIC retirement.

        I think we need some everyday advice far more of these folks than those you just mentioned with the money for financial advisors etc. I am lucky to have a small defined benefit package and some RRSPs but will also rely on gov’t pensions. Actually I am quite proud of what I’ve managed to do in 15 years.I seek out advice constantly for tips from many sites such as this but really need some simpler scenarios.

        I very much enjoy your site and know you have many wealthy folks as well but please balance it with other scenarios for educated worried folks like myself!

  6. If they are concerned about the estate preservation in the rental option, they could consider a Joint last to die permanent insurance product and relieve themselves of the worry about saving something. There was no indication of any dependants so why are they concerned about it?

    I agree with the above comment regarding the value of their investments. They are not typical of the majority of Canadians making much tougher decisions with more likelihood of running out of money.

    No consideration was given to reduce income while maintainingredients cash flow to avoid losing the age eexemption,

  7. There are two significant omissions in this article. One, the cost of home ownership is significant more than renting a comparable rental property. There is no mention of the cost of owning a home such as property tax, home maintenance, real estate fees if they decide to sell.

    Two, asset depreciation. Owning a home is great if the value increases every year. With interest rates increasing, home owners will likely start losing money every year.

    I sold my home 2 years ago and rent a 2 bedroom condo in downtown Toronto. My expenses are a fraction of what I was paying to own my home i.e. yard, heating, cooling, interior decorating, repair and replacement of windows, doors, furnace, shingles,commuting, car expenses.

    If this couple thinks they will outlive their money they need serious financial planning help. If you want to leave money for your kids and grand kids buy life insurance, then enjoy your wealth by travelling while you are physically capable.

    • Hi Neil,

      Thank you for your comment. The Smith’s assumed that their overall expenses would rise by $30K annually if they rented. They were planning on moving to a province with a much higher cost of living to be near their children, so they assumed the costs would be that much higher, taking all factors into consideration.

      Certainly life insurance is an option.

      Brenda

    • Home ownership is often a lifestyle choice, whether location or a pool or garden in the backyard.

      The value of the home is irrelevant if you can afford the upkeep.

      The value is irrelevant because often times it is realized when liquidating the person’s estate: the value then is for the heirs, not an important consideration for the living. Leave money for kids & other heirs? Life insurance – but you need income to pay for that.

      Affording the upkeep is the critical issue and that is why my priority is how much income my assets can generate and how much they cost to maintain.

      Since 2006 my average gross return on investment has topped 14%, the most income tax I’ve paid is 8%, my initial capital has doubled since 2002. Maintaining my portfolio (Margin interest) varies every year because the rate changes almost yearly from almost nothing to 6.75% – but that is 100% tax deductible just like an RRSP contribution would be.

      So let’s say your assets generate 14% gross income (like mine does), how much capital/assets do you need for your situation? (A $50,000 life style would require about $360,000 – =$50,000÷14%)

      20 years ago this was near impossible (except in the early 80s when mortgages were 21% and 5-year Canada Savings Bonds were 18%). Today it is almost easy.

  8. Hi Pauline
    You ask, “How can this man get the max OAS?”. I believe it was explained in the article how. By converting his RRSPs and locked in RRSP into RRIF and LRIF vehicles. They can then better control the amount of income that they withdraw. As long as Jim’s maximum annual income stays below the threshold where the 15% OAS clawback kicks in they will fine. You also have to remember two other points. 1) They were concerned about capital preservation. 2) They were conservative investors or had fairly conservative expectations for the returns on their investments. I can assure you if they do not take the advice provided they risk at least two unfortunate outcomes. 1) OAS clawback. 2) Outliving their money.
    Thanks again for the timely article Brenda. And Jim thanks for publishing it on your blog.

  9. Hi Brenda (Hiscock)

    I’m responding to your response regarding an earlier comment that I had made related to splitting pension income with a spouse. I missed the point originally as I assumed you were only referring to LIF, LRIF and RRIF pension income. After rereading your comment I see that you also include company pensions. Can you please verify your comments in this regard? The reason for the request is because I have been collecting a small pension from a previous employer since the age of 55. Neither my wife or myself are 65 yet. I have been splitting that pension income with my wife for the past 7 years and the CRA has been allowing it. If your point regarding company pensions is accurate I’m very concerned that the CRA will fianally realize their mistake, reassess my past returns, and send me a huge bill for past taxes and interest.

  10. Hi Brenda,

    I found this to be a very enlightening article. One question though. Since Jim is already 65 can’t he create a LIF immediately and start making withdrawals so as to get the $2000 pension income tax credit this year as well as in subsequent years? Are there restrictions about LIF withdrawals that I am unaware of?

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