With ample savings, couple can plan givings

Situation couple worried about adequacy of savings for retirement Strategy cut portfolio risk and management costs, plan to give to charities Solution a satisfactory financial plan with tax advantages

In British Columbia, a couple we’ ll call Norman and Georgina, both 58, are headed into retirement. A long time high-tech executive, Norman expects to end his career in two years. Georgina, a healthcare professional, has been retired for a few years but takes occasional assignments from the B.C. government. They have a combined take-home income of $11,411 a month, $ 1.75- million in total assets and no debts. Their problem is figuring out exactly when to make a complete break and make retirement final and complete.

Their future would seem assured, yet in their prosperity they have an issue — how to make use of their good fortune. They have already downsized from a house to a condo, shed one car and topped up their RRSPs.

“Our issue is that we are not sure when we can retire fully,” Georgina says. “We want to continue our comfortable way of life, so we have to be sure we won’t run out of money.”

Family Finance asked Adrian Mastracci, a financial planner and portfolio manager who heads KCM Wealth Management Inc. in Vancouver, to work with the couple.

“We don’t see too many people who are more ready for retirement than this couple is,” Mr. Mastracci says. “They never spend more than their incomes, they have no debts, they have no children and they have no wish to leave legacies to anyone.”

RetiRement planning

Norman and Georgina save $71,100 a year. If that sum is added to present financial assets under their control (this excludes life insurance cash value) of $920,000, then, growing at 3% after inflation, in seven years at age 65, they would have $1,692,725.

That sum would generate $50,780 a year at the same rate. In addition, Georgina receives $19,659 of indexed employment pension income. Both will get $6,540 of Old Age Security benefits at 65, and Canada Pension Plan benefits at age 65 of $11,840 each.

That adds up to $107,200 in 2012 dollars. They can split pension income, so the clawback, which begins at $ 69,562 in 2012, will not affect them. After estimated average tax of 33%, they will have about $5,985 to spend each month, which is close to current monthly spending with savings excluded. Retirement at 60 would cut about $1,800 out of their monthly aftertax income with no savings possible. That would erode their future security, Mr. Mastracci says.

The main risk to their future prosperity is in their portfolio, which is a blend of mutual funds and real estate limited partnerships. There is more risk in the portfolio than is appropriate to folks near the end of their careers, Mr. Mastracci says. They could deal with that by shifting out of mutual funds with high management fees and winding up the partnerships when they can. The shifts need to be done with a view to penalty fees for their deferred sales commission funds and to marketability of their partnerships. They can find exchange-traded funds with fees that are as low as 0.10% compared to the 2.6% common in equity funds. In time, the fee difference will result in higher long- term gains, Mr. Mastracci suggests. Also, by reducing their limited partnerships, the couple will cut portfolio volatility.

In rearranging their portfolio, Norman and Georgina should aim for a 50/ 50 allocation between stocks and bonds. The stock portion can be half Canadian issues and half foreign issues. The bond portion can be half a ladder of three- to five- year investmentgrade corporate bonds that pay 2% to 3% more than federal government bonds. As these bonds mature, they can be rolled into new corporate bonds likely to have higher interest rates. The other half can go into preferred shares that, while not as secure as bonds, receive the dividend tax credit and thus have a relatively high aftertax yield. They can select bonds and preferreds through study of markets or with guidance from their investment advisor, Mr. Mastracci suggests.

ShaRing good foRtune

Norman and Georgina have more money than they need to continue their way of life. They could raise payouts from their capital to exhaust it by age 95. That would add about 15% to investment income, but they would not necessarily spend that income.

Alternatively, they can investigate the merits of charitable endeavours to which they may want to give money. They can do that by checking websites maintained by the Canada Revenue Agency and the U.S. Internal Revenue Service. Those databases provide a modest amount of financial information. Norman and Elaine should also investigate the efficiency with which charities use money. How much goes for salaries, how much for “development,” which usually means fundraising? They can glean some of that information from charities’ published financial statements and by meeting officers of the causes that interest them.

If the couple want to make donations, the question arises whether they should donate money from the sale of financial assets or donate the assets directly.

The answer? Donate shares and other assets that have appreciated in value, Mr. Mastracci says.

If the property has appreciated in value over the purchase price, the donor can sell it, pay capital gains tax and get a tax credit for the sum donated. But if the assets themselves are donated, the charity gets the same amount of money but the donor does not have to pay capital gains tax.

“Norman and Georgina have more than enough money for their needs and can retire with no financial worries at 65,” Mr. Mastracci says. “They have an opportunity to make a difference on two fronts, for they can donate financial resources and their time.”