National Post Article: Soon-to-retire couple needs $185,000 a year to meet their desired lifestyle

The National Post asked me to review the finances of a couple who are both in their 60s and want to retire at the end of 2024.

They would like to enjoy a lifestyle where they can enjoy trips to Europe and Asia each year, and not feel financially constrained, so they will only retire if their income allows them this freedom.

Based in Saskatchewan, both have scaled down their work hours, and they’ve recently downsized.

Currently they have an investment portfolio worth about $2.3 million (with unrealized capital gains of some $400,000 or so), which is invested largely in equities (about $1.94 million) in registered accounts and managed by a bank-run brokerage. 

In the article you’ll learn:

• How much they need before tax to retire with the lifestyle they want.
• A recommended creative strategy they can use to make their mortgage tax-deductible, which would free up money for travel and to invest.  
• What to do about their pensions.
• When they should convert their RRSPs to RRIFs.
• How much to withdraw from their investments for good cash flow with minimum tax.
• What to do with non-registered investments with significant unrealized capital gains.
• How they can maximize Old Age Security (OAS) and the Guaranteed Income Supplement benefits while avoiding clawbacks.
• What they should do about their TFSAs.
• What should they do about their wills and estate?

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

Soon-to-retire couple needs $185,000 a year to meet their desired lifestyle

Financial snapshot:

JOINT CHEQUING ACCT

$15k-$20k CDN balance. Credit cards are paid monthly in full.

US SAVINGS ACCT

$5K-$15K USD balance. Used mainly for travel / 2-week winter holiday(s)

INVESTMENT ACCT #1

$154K USD and CDN equities. However, unrealized capital gains are $80k – kind of handcuffed. 

INVESTMENT ACCT #2. 

Small amount and not sure why we have it. $2.3k and unrealized gains of $850.

LILLIAN’S RRSP

$621K. USD and CDN equities and mutual funds. Unrealized gains of $100k. Includes a $75k GIC that matures August 2026 and Near-cash of $160k.

JAMES’  RRSP

$697K  USD and CDN equities and mutual funds. Unrealized gains of $110k. Includes 2 x $75k GICs – one matures in Mar 2025 and the other in August 2026 and Near-cash of $215k

JAMES’ LIRA

$340k USD and CDN equities and mutual funds. Unrealized gains of $46k. Includes a $25k GIC that matures in Aug 2026 and Near-cash of $136k.

RESP

$33K today, soon to be drawn down $5k to $28k.

LILLIAN’S TFSA

$118K. Unrealized gains of $29k.

JAMES’ TFSA

$128k. Unrealized gains of $33k.

LOAN RECEIVABLE of $100k

Due May 1’ish, 2024 – balloon payment of $113k, Principle and Interest.

HOME (3 year old condo bungalow) $850k

Mortgage $430k – Fixed 2.74%, matures Dec 30, 2024

Monthly payments $2,531

VEHICLES $225K (newer vehicles, free and clear)

RECREATION (free and clear) — $270k invested

• SEASONAL CAMPSITE (99 year lease) $35k
• Motorhome $90k
• Pontoon and trailer $60k
• 2 x Sea-Doos and trailer $15k
• Golf Cart $5k
• Campsite Improvements $65k

Financial Planning Notes & Ed’s Insights

James and his wife Lillian, who will turn 60 this year, would like to retire at the end of 2024 but only if they can ensure they are able to enjoy a lifestyle that affords them the ability to enjoy trips to Europe and Asia each year and not feel financially constrained. 

To support their existing lifestyle of $11,993/month after tax plus about $15,000/year more for travel to Europe & Asia, they would need about $208,000/year before tax. With a long-term rate of return of about 7.2% before they retire and 6.5% after they retire (based on their investments of about 80% equities / 20% fixed income), they would need about $2.7 million in investments to afford their desired retirement. They only have about $2.2 million. To be on track, they should work 2 more years until age 70 for James & 58 for Lillian.

If they can live comfortably enough with their existing spending, they would need $185,000/year before tax and they can retire now. That would mean their travel to Europe & Asia would be limited to the $9,700/year they spend on travel now.

The couple would like to know when the experts think he should start drawing his pension. 

The pension estimates for James’ pension appear to not include the “spousal deduction” that should reduce the pension by close to 10%. They could be right, but appear to be what he would get if he was single.

It is important to be careful with pension estimates to be clear what they are estimating. Unless specified, pension estimates often don’t allow for the spousal deduction and often show the pension in today’s dollars, not the actual future dollars they would receive.

James should start his pension when he retires. It is a part of his retirement plan. The annual increases for waiting look large, but are comparable to the more comfortable retirement their investments would support for each additional year they work.

Starting before he retires would mean high taxes. Starting any later than when he retires would mean they have to deplete their investments significantly.

A retirement plan would help them think through the lifestyle they really want. Then they would know when they can retire confidently.

The couple also has a non-registered investment account worth $154,000 with unrealized capital gains of $80,000. It is largely invested in banks and technology companies. “From a tax-planning perspective, I don’t know what to do with it,” said James. “Is there a way to roll it into a TFSA?”

This spring they have a loan receivable that will come due worth $113,000. This money will be used to pay down 10% of the mortgage (the allowable annual extra payment) and double up payments going forward to help aggressively pay down the total. They’d like to know if the experts agree with this plan or if there is a better use for the funds.

They cannot roll their non-registered portfolio into their TFSAs, other than $7,000/year each for new TFSA room. There is nothing wrong with non-registered investments. Many people are only used to RRSPs and TFSAs. They can invest their non-registered investments similar to their RRSPs as part of their retirement portfolio, except that tax-efficiency is important. They could, for example, hold all their GICs and fixed income investments in their RRSPs, instead of non-registered investments.

In general, investing the $113,000 from the loan receivable and just maintaining their existing mortgage payments (instead of doubling-up) should help them retire more comfortably. Their investments should make more than their mortgage interest even after tax. They would have to sell more investments to make double-up mortgage payments and most of their investments are RRSPs.

Their mortgage will have about 25 years left after it renews at today’s higher rates in December, and 15 years if they pay down the $113,000. That is still a long time into their retirement.

If they are looking for an effective tax strategy for their non-registered investments, they could use them and part of their TFSAs to make their mortgage tax-deductible. This is called the “Singleton Shuffle” (named after a court case).

In December, they could pay off their mortgage using their non-registered investments, loan receivable and some of their TFSA, then immediately borrow it back to buy back similar investments, but all non-registered. They would have the same investments and mortgage, but the mortgage interest would be tax deductible.

This difference helps their retirement a lot. They would normally need $45,000/year of their pension income to make the $30,000/year mortgage payments, but if the interest is tax-deductible, then they only need about $30,000. This saving of $15,000/year before tax can give them about $10,000/year more after tax, which can allow them to travel to Europe and Asia.

A bit of creative tax planning can make their retirement much more comfortable!

James has not applied for Canada Pension Plan benefits, and at this point Lillian isn’t planning to when she turns 60. “We don’t know the economic pros and cons of collecting CPP at ages 60, 65 and 70,” said James. “We also aren’t sure how Old Age Security and the Guaranteed Income Supplement can be maximized at certain income levels while avoiding or minimizing clawbacks.”

Delaying CPP from age 60 to 65 gives you a similar extra income for life as 10.4%/year return on your investments, but delaying from 65 to 70 is an implied return of only 6.8%. With their given asset allocation of 80/20 equities/fixed income, Lillian should wait to age 65 to start. James should start his CPP as soon as he retires.

Clawbacks for the Old Age Security should not be an issue for them, unless they take larger lump sums out of their RRSPs. The clawback is 15% on taxable income over $91,000/year each. Their retirement goal is $185,000/year or $92,500/year each. By withdrawing a bit from non-registered investments each year, they should be able to keep their taxable incomes below $91,000. This would be easy if they do the Singleton Shuffle to make their mortgage tax-deductible.

James and Lillian would also like the experts to address what they should do with their GICs (worth $425,000) which mature in 2025 and 2026. More generally, is their portfolio’s asset allocation appropriate?

They have not discussed their risk tolerance, so I cannot comment on their asset allocation. They are 80% equities/20% fixed income. This should give them enough growth for their retirement, but barely. Many seniors invest more conservatively, but James & Lillian seem comfortable with their allocation. Studies show a higher equity allocation held through a 30-year retirement has been both more reliable and provided a higher retirement income.

What strategy should they employ in terms of transferring RRSPs to RRIFs and draw downs to ensure they have adequate cash flow in retirement while minimizing tax.

They should convert their RRSPs to RRIFs when they retire and start taking a regular amount, probably the minimum withdrawal or a bit more. They should plan their retirement income to target the $185,000/year before tax they need, while keeping their taxable incomes below $91,000/year each to avoid the OAS clawback.

To do this, they would take their pensions and most of the difference from their RRIFs to give them about $85,000/year taxable income each. Then withdraw about $10,000/year from their non-registered investments every year to get to their desired retirement cash flow.

They should not withdraw from their TFSAs and continue to transfer $7,000/year into each of their TFSAs from their non-registered investments, so that they can make them all tax-free over time.

In terms of their estate and wills, what should they be taking into account?

At this point, the main estate planning would be to make sure their wills and Powers of Attorney documents are current and reflect their wishes.

They probably do not need life insurance after they retire. The main possible reason to have some would be if James’ pension survivor benefit would only give Lillian 60% of the pension. Then her income could be down $30,000/year or so if she outlives him. She probably would spend less than they spend together, but would need about $500,000 in a 20-year term policy to replace the lost pension. If James’ pension has the option for a 100% survivor benefit, then they probably don’t need any life insurance.

It is too early in their lives to consider giving their kids an early inheritance. They likely will need most or all of it for their desired retirement lifestyle.