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A more practical approach may be to stipulate in their wills when and for what purpose assets should be released.Glenn Lowson/The Globe and Mail

Tyler and Isabel have no firm plans yet to retire from their well-paying jobs in the health care sector, but they do have some questions about their financial future. Tyler is 57, Isabel is 51. They have one child, age 15, and a mortgage-free house in a desirable part of southern Ontario.

Tyler earns $118,000 a year and is a member of a defined benefit pension plan. Isabel makes $75,000 a year and contributes to a group registered retirement savings plan (RRSP) at work. They’d like an assessment of their retirement readiness by the time Tyler turns 60, the earliest age at which he can get an unreduced pension. He may decide to work longer. Isabel plans to retire at the same time as Tyler.

Do-it-yourself investors, Tyler and Isabel have built a substantial investment portfolio mainly of dividend-paying, blue-chip stocks. After they leave the work force, they would like to use their investment income for their living expenses and ideally never touch the principal.

They ask how to co-ordinate the drawdown of their registered accounts with the collection of government benefits. As well, they wonder what steps could be taken to preserve their estate for their son in the event they pass away while he is still young. They are both in good health.

Their retirement spending goal is $130,000 a year after tax.

We asked Barbara Knoblach, a certified financial planner at Money Coaches Canada, to look and Tyler and Isabel’s situation.

What the Expert Says

Tyler and Isabel have an impressive asset base, with an investment portfolio of about $2.3-million, excluding bank accounts earmarked for spending, Ms. Knoblach says.

They each have RRSPs, locked-in retirement accounts from previous employers and tax-free savings accounts (TFSAs). As well, Isabel contributes to a group RRSP to which her employer makes matching contributions.

“Another significant asset is Tyler’s defined benefit pension,” the planner says. When Tyler turns 60, he will get a pension of $57,120 a year, assuming he opts for a 100-per-cent survivor benefit. He will get a bridge benefit of $2,760 to age 65. The 100-per-cent survivor benefit is likely the best choice because Tyler is several years older than Isabel and she does not have a defined benefit pension of her own.

Tyler and Isabel ask whether their dividend income will be enough to supplement their pensions and other savings without having to touch the principal in their non-registered account. Investment income can be difficult to predict, Ms. Knoblach notes. Instead, she assesses whether they can spend $130,000 a year when they retire while still maintaining their inflation-adjusted net worth.

Their spending goal appears to be quite realistic, Ms. Knoblach says. “They will not feel a pinch at retirement.” They can spend $130,000 a year and their inflation-adjusted investment assets would continue to grow. The forecast assumes an inflation rate of 2.1 per cent and an average annual rate of return of 6 per cent.

Early in retirement, their main sources of income will be Tyler’s pension and their locked-in retirement accounts (LIRA) and RRSPs.

If Tyler retires at age 60, he should immediately begin collecting his pension, the planner says. He can split his pension income with Isabel. As well, he could convert his LIRA to a life income fund right away. Isabel, who will be 54 when Tyler retires, can convert her LIRA to a LIF at age 55. “Drawdown from the LIFs should be initiated early because there is an upper and lower drawdown limit,” Ms. Knoblach says. This is not the case with RRSPs when they are converted to registered retirement income funds (RRIFs), so RRIFs offer more flexibility than LIFs in accessing funds, she says.

They could use the time from Tyler’s retirement to when they begin collecting government benefits as a window of opportunity for a drawdown of their RRSPs (converted to RRIFs), she says. During this time, they should draw more than they need to meet their spending target and the surplus funds should be invested in their TFSAs and non-registered account. Drawing on the RRSPs or RRIFs early will help mitigate any clawback of OAS benefits.

They should defer CPP benefits until they are at least 65, and preferably defer both CPP and OAS to age 70, provided they are still healthy.

“Income from a LIF or RRIF is considered pension income that can be split with a spouse only if the annuitant is at least 65 years old,” the planner says. “Once their RRIFs and LIFs have effectively been drawn down, Tyler and Isabel should access funds in their non-registered accounts for their living expenses,” Ms. Knoblach says.

“They will likely be able to live off the investment income only without ever having to touch the principal in these accounts.” They should continue to contribute the annual maximum to their TFSAs. “The TFSAs can grow to a considerable size and never be taxable.” Isabel and Tyler will likely never have to draw on the funds from their TFSAs for their retirement income.

Tyler and Isabel are concerned about their son’s ability to manage their wealth if they die while he is still young, the planner notes. They wonder whether they should set up a trust. Trusts can be costly to set up and maintain, but they may make sense in serious situations such as addiction or disability, the planner says. A trust would have to be at least $500,000 to make sense financially, she says. Besides, Tyler and Isabel may want to have that money to help their child with the purchase of a first home rather than having it tied up in a trust.

A more practical approach may be to stipulate in their wills when and for what purpose assets should be released. “Tyler and Isabel would have to identify a friend, family member or professional who could take on the role of trustee and provide stewardship of their estate while their child is still young.”


Client Situation

The People: Tyler, 57, Isabel, 51, and their son, age 15.

The Problem: Are they on track to spend $130,000 a year and preserve their investment principal? How should they draw down their savings? Should they open a trust for their child?

The Plan: Keep saving and retire as planned at Tyler’s age 60. Draw down their LIFs and RRSPs early to lessen the potential for an OAS clawback.

The Payoff: Reassurance that they have more than enough to retire and enjoy their desired lifestyle.

Monthly net income: $11,035.

Assets: Cash in bank $30,000; joint investment account $900,200; locked in retirement accounts $302,200; RRSPs $863,200; TFSAs $260,000; registered education savings plan $53,000; residence $1-million. Total: $3.4-million.

Estimated present value of his DB pension $1-million. This is what a person with no pension would have to save to generate the same income.

Monthly outlays: Property tax $300; water, sewer, garbage $100; home insurance $100; electricity $140; heating $200; maintenance, garden $150; vehicle lease $950; transportation $800; groceries $600; clothing $100; gifts $100; charity $450; vacation, travel $1,200; other discretionary $200; dining, drinks, entertainment $500; personal care $50; club memberships $100; pets $50; sports, hobbies $100; subscriptions $20; other personal $200; disability insurance $100; phones, TV, internet $260; RRSPs $600; TFSAs $1,085. Total: $8,455. Surplus goes mainly to saving.

Liabilities: None.

Want a free financial facelift? E-mail [email protected].

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

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