Can Genevieve and Sam retire and spend more time traveling?


Geneviève is 62 years old, while Sam, who is 64, has ended his business and is receiving Canada Pension Plan benefits.Christine Muschi/The Globe and Mail

In a year, when her contract ends, Genevieve plans to quit her $85,000-a-year consulting job so she and her husband Sam can spend more time traveling. She is 62 years old. Sam, who is 64, has quit his business and is collecting Canada Pension Plan benefits.

Geneviève took early retirement from her career in financial services a few years ago and receives a pension of $42,000 per year. She also earns about $12,000 a year in net rental income. In addition to substantial savings, they have a condo in Ontario and a chalet in Quebec. Together they have five adult children.

“We would appreciate a review of our finances so that we can effectively manage our taxes and have a solid plan for the future,” Genevieve wrote in an email. “Will our funds last until we reach the age of 100 (hopefully)? We are a healthy and active couple. They also wonder if they should buy disability and critical illness insurance.

Their spending goal is $78,000 per year after tax, indexed to inflation.

We asked Ian Calvert, vice president and director of HighView Financial Group in Toronto, to look into Sam and Geneviève’s situation. Mr. Calvert holds the Certified Financial Planner (CFP) and Certified Investment Manager (CIM) designations.

What the expert says

With Genevieve’s contract income of $85,000 a year, their cash flow is extremely healthy today, Calvert says. “Now that their working years are almost over, they need a retirement plan that not only puts money in their hands in a tax-efficient way, but organizes their balance sheet for a tax-efficient transfer of wealth to their children” , says the planner.

The first place to start is their Registered Retirement Savings Plan. Together, they have just over $1.1 million in RRSPs. “This is a great achievement, a sign that contributing to an RRSP during their high-income working years was a priority.

To make up for their cash flow deficit when Genevieve retires, their RRSPs will play an important role, says Mr. Calvert. The first step should be to convert their RRSPs to Registered Retirement Income Funds, or RRIFs. “It’s not necessary at their age, but this transition moves their funds to a much friendlier withdrawal vehicle,” he says. They could withdraw directly from their RRSPs, but “for a number of reasons, that doesn’t make sense”.

A withdrawal from an RRSP (also called partial deregistration) is not considered eligible pension income. “This means that this income is not eligible for the pension income tax credit, nor can it be shared with your spouse at age 65,” says the planner. Additionally, most financial institutions charge an unsubscribe fee, which is often $50 per withdrawal. “If someone is looking to set up a monthly or quarterly withdrawal plan, those unsubscribe fees can definitely add up and are avoidable with proper planning.”

Perhaps the only downside to early conversion is that once the RRSP is converted to a RRIF, there will be a minimum taxable withdrawal each year. “However, you can make the early RRIF conversion with confidence if you’re backed by a comprehensive retirement cash flow plan,” he says.

If Genevieve and Sam both convert, their combined minimum RRIF withdrawal will be approximately $44,000 per year. That $44,000, combined with Genevieve’s pension of $42,000, Sam’s CPP of $10,925, Sam’s OAS of $8,020 (he plans to take it when he turns 65), and a net rental income of $12,000, would bring their total family income to about $123,500 per year after accounting. for $6,500 of taxable income in their non-registered portfolio. After making $5,400 per year on their line of credit and family taxes of $25,300, they would have a free cash flow of $86,300 per year, exceeding their goal of $78,000.

After splitting their qualifying pension income, their taxable income would be approximately $61,750 each. “From a taxable income perspective, it’s a great place,” says Calvert. Most of their income is taxed in the two lowest marginal tax brackets (federal and Quebec combined). It also leaves a healthy buffer for when Genevieve decides to take her CPP and OAS benefits, the planner says. In other words, the extra income from their CPP and OAS will not push them into an unfavorable and punitive tax bracket, or risk having their OAS clawed back, which happens at income levels above 81 $761 per year.

Geneviève asks when would be the best time to take her CPP and OAS. “There’s no one-size-fits-all answer to this question and lots of different opinions,” Calvert says. Since Genevieve and Sam can supplement their cash flow upon early conversion of their RRIF, with the help of Genevieve’s pension and Sam’s government benefits, there is no need for Genevieve to take CPP and OAS. at age 65. She could postpone both to 70 years. because she and Sam are not dependent on income, he says. Waiting until age 70 will increase her CPP benefits by 42% and her OAS benefits by 36%. “This is an exciting increase in a source of stable, indexed retirement income.”

If their lifestyle needs remain at $78,000, indexed to inflation, and they can earn an average annualized rate of return of 5% on their RRIF, tax-free savings accounts and portfolio unregistered, they can confidently spend as much until age 100, says the planner. If they direct any excess cash to their TFSA each year, their balance sheet will become very tax-efficient, he says. “Having the majority of your long-term wealth in your principal residence and your TFSAs, two tax-free assets, will ensure a very tax-efficient transfer of wealth to the next generation.

Sam and Genevieve have approximately $207,000 in their unregistered wallet. Any investment income and capital gains in this account will increase their taxable income each year. They should try to hold most of their Canadian stocks in this non-registered account because dividends from Canadian corporations are taxed favorably, he says. They could hold most of their dividend-paying US stocks in their RRIF. “Eligible Canadian dividends are extremely tax efficient because of the dividend tax credit,” says Calvert.

As for critical illness and long-term care insurance, both have a cost, which increases as the insured ages, the planner says. “Given their level of investable assets, their two properties and their stable source of retirement income, Genevieve and Sam’s retirement plan could absorb the material blow of a critical illness diagnosis or health care costs. higher health care.”

Status of customers

The people: Sam, 64; Genevieve, 62; and their adult children

The problem: How to withdraw their savings and investments in the most tax-efficient way. Assess whether their funds will last up to 100 years.

The plan: Once Geneviève retires, convert her RRSPs to RRIFs to make up the shortfall. Geneviève can defer government benefits for up to 70 years. Organize your investments in a tax-efficient manner with a target rate of return of 5%.

Gain : A comfortable retirement without having to worry about running out of money.

Net monthly income: $8,885

Assets: Cash $42,400; unregistered shares $207,000; his TFSA of $95,000; his TFSA of $41,000; his RRSP $585,000; his RRSP $520,000; condominium $675,000; cottage $725,000; estimated present value of his DB pension $630,000. Total: $3.5 million

Monthly expenses: Property tax $285; home insurance $150; electricity $250; heating $50; maintenance $300; garden $50; transportation $405; groceries $1,000; clothing $100; line of credit $415; gifts, charity $400; vacation, travel $1,000; other discretionary $100; meals, beverages, entertainment $350; personal care $75; club membership $20; pets $100; sports, hobbies $100; subscriptions $100; doctors, dentists $150; other health care $105; cell phones, Internet $165; TFSA $1,000. Total: $6,670. The surplus goes to savings.

Passives: Line of credit for lease $200,000

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