New beginnings: Same lifestyle, different perch

Lucille and Larry are hoping to leave their well-paying management careers and retire this fall. He is 61, she is 60. Together, they bring in more than $300,000 a year.

While they have substantial savings, mainly in their registered retirement savings plans, they will likely sell their Toronto house and buy a place outside of the city in the $500,000 range. They would invest the balance, Larry writes in an e-mail. They wonder whether it will be “economically feasible” to retire before the end of the year. Their retirement spending goal is $100,000 a year after tax.

“What is the best option for converting existing RRSP balances into an income-generating stream?” Larry asks. “When should we start taking Canada Pension Plan benefits?”

We asked Jason Pereira, a financial planner at Woodgate & IPC Securities Corp. of Toronto, to look at Lucille and Larry’s situation.

What the expert says

Larry and Lucille can retire as planned with a minimum rate of return on their investments of 4.75 per cent, Mr. Pereira says. He recommends they set up a $51,000 emergency fund in a non-registered investment account using a corporate-class short-term bond fund. “Bond funds come with some downside risk, but historically they have performed better than high-interest savings accounts,” the planner says. Corporate-class funds lower a person’s tax bill by converting income into capital gains and potentially deferring the tax bill until the fund is sold, he adds.

As it is, their portfolio is a bit of a hodgepodge, with an assortment of different investments. The planner suggests the couple shift to an income-generating portfolio of 60 per cent bonds and 40 per cent stocks. Historically, such a portfolio has yielded 5.8 per cent a year on average, Mr. Pereira says.

He recommends they consolidate their holdings to help ensure they stick to a proper asset allocation, and that they choose an investment firm that offers comprehensive financial planning as well as investment advice.

Here is how the couple’s cash flow and savings plan look assuming they both quit working in October:

They will have total income, including Canada Pension Plan benefits, of $246,250 for the current year.

Mr. Pereira recommends Lucille and Larry begin collecting CPP benefits immediately after they quit working. “Starting CPP early means you rely less on your own money because the government is footing some of the bill,” the planner says. “While it does reduce the amount you receive, in their case, leaving more of their money untouched for longer results in their nest egg growing longer, and hence gives them a larger projected estate – or the ability to increase their spending if they need or want to.”

They will pay combined income tax of $68,205, and $6,904 in CPP and employment insurance premiums, leaving them with after-tax cash flow of $171,141. Their tax refunds for the 2017 tax year from RRSP contributions will total $34,206, leaving them with total cash flow for 2018 of $205,347.

From that, the planner deducts lifestyle expenses of $104,460 a year, leaving free cash flow (for savings) of $114,695. This is allocated as follows: Larry’s RRSP $9,327; Larry’s tax-free savings account $5,500; Lucille’s TFSA $5,500; their taxable investment account $94,368. He recommends Larry contribute to his RRSP this year because he is in a much higher tax bracket than he will be after he retires. In the plan, neither contributes to their RRSPs in future, but both continue to contribute to their TFSAs.

He further recommends they begin making the minimum withdrawals from their RRSPs in 2019. “Doing so results in a projected estate of $250,000 more than otherwise,” the planner says.

“The RRSPs represent a large deferred-tax liability,” Mr. Pereira says. “They could finance their retirement up to age 71 with their non-taxable portfolio and TFSA assets, but doing so would result in their being at very low tax brackets for those years and much higher ones at age 71 when the RRSP converts to a registered retirement income fund,” he says. “By starting early, they are taking advantage of those low tax rates, and thereby reducing their total lifetime tax bill.”

In 2019, they will draw $18,077 in CPP benefits, $30,294 from their RRIFs, and $3,414 from their non-registered accounts. The balance will come from net proceeds from their house sale ($440,780).

In drawing up his forecast, Mr. Pereira assumes Larry and Lucille replace their vehicles every four years starting in 2022; that they sell their house and downsize to a condo or out-of-town residence that costs $550,000; that the move will cost 7 per cent of the selling price; and that their maintenance costs after they move will drop from $10,500 a year to $5,500 a year.

As for their investments, Mr. Pereira recommends they invest their taxable portfolios in corporate-class mutual funds. This will lower their tax bill and allow them to defer paying the tax until time of sale.

Client situation

The people: Lucille, 60, and Larry, 61

The problem: Can they retire this fall with $100,000 a year, after tax?

The plan: Retire as planned this fall, downsizing the following year. Start taking CPP immediately. Consolidate investments and draw up a clear plan.

The payoff: The satisfaction of knowing they are making the most of their savings and investments.

Monthly net income (2018): $15,410

Assets: Residence $1,050,000; cash $5,000; emergency fund $51,000; joint taxable investment account $148,465; his locked-in retirement account $254,605; his RRSP $529,475; his deferred profit sharing plan $53,335; his TFSA $47,840; her locked-in retirement account $22,145; her RRSP $328,460; her TFSA $59,970; her employee share ownership plan $11,040. Total: $2.56-million

Monthly outlays (2017): Property tax $390; home insurance $110; utilities $365; maintenance $350; car insurance $240; fuel $350; oil $150; maintenance $350; parking $50; grocery store $900; clothing $225; gifts, charity $350; vacation, travel $1,500; other discretionary $250; dining, drinks, entertainment $1,300; grooming $75; recreation $250; pets $300; subscriptions $75; health care (dentists, drugstore) $300; phones, TV, internet $300; RRSP contributions $5,500; TFSAs $900. Total: $14,580

Liabilities: None

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Some details may be changed to protect the privacy of the persons profiled.

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