Clear­ing the path to­ward early re­tire­ment

The Globe and Mail (BC Edition) - - REPORT ON BUSINESS - DIANNE MA­LEY

Given that there is not ex­pected to be a sig­nif­i­cant in­crease in tax brack­ets later on in re­tire­ment, my sug­ges­tion for now is to de­lay with­draw­ing from the RRSP.


With mod­est goals, Herb and Hat­tie may not have to draw on in­vest­ment in­come right away

Herb has a union job in the oil patch that takes him away from home more than he would like. At the age of 63, his goal is both rea­son­able and mod­est: to re­tire from his $120,000 a year job next year and spend time gar­den­ing, cy­cling and trav­el­ling south each win­ter with his wife, Hat­tie, who is 11 years younger.

Hat­tie, who is self-em­ployed and earns about $30,000 a year, would re­tire at the age of 55 “so we can do things to­gether be­fore I’m too old,” Herb writes in an email. They have two chil­dren, ages 21 and 31.

Herb has a work pen­sion that will pay him $2,300 a month, not in­dexed to in­fla­tion, start­ing at the age of 65. They also have sav­ings and in­vest­ments.

Herb’s main con­cern is how to struc­ture their re­tire­ment cash flow. Their spend­ing goal is $60,000 a year af­ter tax. “My ques­tion is, what should I draw down first and what should I leave for later, al­ways keep­ing in mind tax ef­fi­ciency,” Herb writes. He also won­ders about their port­fo­lio. “Am I prop­erly in­vested?”

We asked Ross McShane, vi­cepres­i­dent of fi­nan­cial plan­ning at Do­herty & As­so­ciates in Ot­tawa, an in­vest­ment coun­selling firm, to look at Herb and Hat­tie’s sit­u­a­tion.


Herb and Hat­tie will have suf­fi­cient as­sets to cover their in­come needs with­out hav­ing to worry about out­liv­ing their cap­i­tal, Mr. McShane says.

In pre­par­ing his fore­cast, the plan­ner makes a num­ber of as­sump­tions, among them a 4.5per-cent av­er­age rate of re­turn, af­ter fees, on their in­vest­ments and an in­fla­tion rate of 2 per cent a year. Herb be­gins col­lect­ing full Canada Pen­sion Plan (CPP) ben­e­fits at the age of 65, and Hat­tie par­tial ben­e­fits, also at 65. They both be­gin tak­ing Old Age Se­cu­rity (OAS) ben­e­fits at 65.

Mr. McShane “bumps up” their re­tire­ment spend­ing goal to $70,000 a year af­ter tax to al­low for ve­hi­cle de­pre­ci­a­tion and to pro­vide a buf­fer against un­ex­pected ex­penses. They are cur­rently spend­ing about $42,000 a year.

If they keep their spend­ing as is next year, they may not have to draw from their in­vest­ment in­come af­ter Herb re­tires mid-year, the plan­ner says. His pen­sion starts in 2020. In 2022 – the first com­plete year in which they are both fully re­tired – they are fore­cast to have $1.5-mil­lion of in- vest­ments, spread among reg­is­tered re­tire­ment sav­ings plans (RRSPs), tax-free sav­ings ac­counts (TFSAs) and non-reg­is­tered, or tax­able, ac­counts.

Their in­come sources will be Herb’s pen­sion, CPP and OAS ben­e­fits to­talling slightly less than $50,000 gross. Hat­tie will have no in­come source (other than in­vest­ments) un­til she turns 65 and be­gins get­ting OAS and CPP. They will need to with­draw $35,000 from their in­vest­ments that year to cover the gap, a with­drawal rate of 2.5 per cent.

“The good news is that they will only be de­pen­dent on the in­come [in­ter­est and div­i­dends] from their port­fo­lio and should not have to draw on their prin­ci­pal,” Mr. McShane says.

Herb can split his pen­sion in­come with Hat­tie, low­er­ing their tax bill. This also will al­low Hat­tie to claim the fed­eral pen­sion in­come credit.

“An ar­gu­ment could be made that Hat­tie should con­sider an RRSP with­drawal in 2022 to take ad­van­tage of her low tax bracket,” Mr. McShane says. But af­ter go­ing over the num­bers, he does not fore­see their tax brack­ets sur­pass­ing 30 per cent in the fu­ture. “Given that there is not ex­pected to be a sig­nif­i­cant in­crease in tax brack­ets later on in re­tire­ment, my sug­ges­tion for now is to de­lay with­draw­ing from the RRSP,” he says. They should re­view this an­nu­ally.

As for their in­vest­ments, they have a “smor­gas­bord” of guar­an­teed in­vest­ment cer­tifi­cates, mu­tual funds, stocks and ex­change­traded funds (ETFs), Mr. McShane notes. Their as­set mix is 30-per-cent cash and fixed in­come and 70-per-cent eq­ui­ties. He won­ders whether they have an over­all strat­egy. “Are all of these ac­counts work­ing to­gether as one?” he asks.

As well, the port­fo­lio is not as tax-ef­fi­cient as it could be, the plan­ner says. The TFSAs are heav­ily weighted with U.S. div­i­dend-pay­ing ETFs “that give rise to a with­hold­ing tax [on the div­i­dends] that is not re­cov­er­able,” he says.

“It is gen­er­ally bet­ter to hold the U.S. div­i­dend pay­ers in the RRSPs with the Cana­dian div­i­dend pay­ers in­side the TFSAs.” This could be taken a step fur­ther by re­plac­ing the U.S. div­i­dend pay­ers that are held in the non­reg­is­tered ac­count with Cana­dian div­i­dend pay­ers, he adds. A div­i­dend from a Cana­dian com­pany is taxed at a lower rate than a div­i­dend from a non-Cana­dian com­pany.

“Bet­ter to hold the for­eign div­i­dend pay­ers in the RRSP.” The over­all mix does not have to change, only the lo­ca­tion of where the in­vest­ments are held, he says. Spe­cial to the Globe and Mail

Want a free fi­nan­cial facelift? E-mail fin­[email protected] Some de­tails may be changed to pro­tect the pri­vacy of the per­sons pro­filed.


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