Devising investment plan is key for retiring couple
Shelley and Victor estimate they will need $150,000 a year to meet their lifestyle goals
THE PEOPLE
Shelly and Victor, both 64, are baby boomers collectively earning $163,000 a year. While they enjoy working as a consultant and registered nurse, they hope to retire next year to spend more time with their adult children and aging parents. They have amassed significant savings due to investing solely in higherrisk equities. THE PROBLEM
The couple doesn’t have a plan for their money and an inherited condo that will likely come in the next few years. Shelly would like to use the condo as a rental property. How will doing this impact their taxes? How should the couple set up their retirement cash flow? They estimate they will need $150,000 a year in retirement income to meet their lifestyle goals. THE PARTICULARS Assets House: $1.2 million Cash: $5,000 Shelly’s RRSP: $1.4 million Victor’s RRSP: $684,350 Shelly’s TFSA: $55,867 Victor’s TFSA: $35,350 Liabilities Mortgage: $13,840 THE PLAN The couple’s biggest risk right now is their portfolio’s over-allocation in stocks, says Robyn Thompson, a feebased financial planner at Castlemark Wealth Management in Toronto. “At their stage in life, such an excessive allocation to stocks is not required to meet their retirement objectives.
“Instead, it puts their financial future in jeopardy,” she says. When markets are rising steadily, as they have been since the financial crisis in 2008, investors tend to believe that the trend will continue indefinitely.
However, markets are cyclical and will always reverse at some point, Thompson notes. Furthermore, markets react most dramatically to surprise events, such as terrorism, war and other unforeseen factors. “It took about five years for the Canadian market to recover losses from the bottom of the financial crisis in 2009,” Thompson says. “Since then, the Canadian stock market has gone on to post new highs without a serious correction. That’s a bull market of almost 10 years.” Thompson recommends Shelly and Victor immediately reduce their stock holdings to 70 per cent and invest the remaining 30 per cent in fixed income to protect their capital. She might recommend more of a reduction for other investors, but this couple has a higher-risk tolerance than most. The couple should review their risk tolerance every year to ensure the risk in their overall portfolio remains aligned with their financial needs.
Shelly and Victor would like to have $150,000 in annual retirement income. Thompson calculates that Shelly will receive $14,160 a year from a defined benefit pension plan.
They will also both collect Canada Pension Plan and Old Age Security payments, giving them a total of $55,460. The rest of their required retirement income will have to come from their invested assets and eventually, some of the income from the inherited condo from her 94-year-old Mom.
The principal residence exemption will be applied to her mother’s condo at death, and the property would then be reset at the current fair market value, with all income and gains then being attributed to Shelly, Thompson explains.
Shelly would like to hold on to the condo and rent it out for approximately $3,000 a month, or $36,000 a year. “This amount will be taxed as income at her marginal tax rate, but Shelly will be able to deduct certain expenses again the income,” Thompson says.
Taxation is another big risk for the couple. Their investments place them in a high-tax bracket, which can also result in their largest erosion of wealth without proper planning.
For example, looking at their current investment setup, most of the couple’s assets are in Registered Retirement Savings Plans, which Thompson says will be taxed at their top marginal tax rate when they begin withdrawals. Step 1 should be topping up their Tax-Free Savings Accounts to their contribution limits as that money will grow without any tax consequences. Thompson also suggests that they allocate all of their remaining investment assets into a joint non-registered account. Meeting with a tax accountant, who specializes in both investment and estate tax planning strategies will be key.
“They will need to address taxes on both Shelly’s mom’s estate and RRIF withdrawal strategies,” Thompson notes. “Given their high post-retirement income, they will see all of their Old Age Security clawed back when they begin RRIF withdrawals at 71.”