Situation: Ontario couple has ample savings, but needs to simplify their financial picture
Solution: Shift taxable funds into RRSPs, trim costs, enjoy retirement
A couple we’ll call Boris and Lynn, both 47, live in Ontario. They have two children, one in university, and are hoping they can afford to retire when they turn 55. They’d like to have $75,000 in 2019 dollars after tax in retirement.
With strong savings, two careers and just $105,000 left on the mortgage on their $950,000 house, the couple is in good shape financially.
But their diligence has left them with a complicated array of investment accounts. “I feel we have too much money going in too many directions,” Boris explains.
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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Boris and Lynn.
Simplifying their finances and working out a strategy for when to draw them down will be key. “They need to decide when to tap those accounts,” Moran says.
Boris and Lynn are taking advantage of tax laws that encourage saving. They have $230,000 in RRSPs, $185,000 in deferred profit-sharing plans, $96,000 in TFSAs, $20,000 in cash and employee savings plans, and $70,000 in non-registered investments. That adds up to $601,000. Boris has a company pension that will pay him $3,300 per month at age 55 dropping to $2,000 per month at 65.
Their monthly take-home pay, $9,325, covers accelerated mortgage payments of $2,300 per month. They have no other debts, so their spending is mostly discretionary, Moran notes. The mortgage is due to be paid off in about four years. Then their discretionary spending can rise. In retirement when they are no longer saving and with the mortgage gone, their allocations will drop by $400 per month for their TFSAs and $65 for life insurance they will no longer need. If they move to a smaller house at 55, monthly costs for taxes, maintenance and utilities should drop from the present total of $1,770, Moran explains. They would no longer have $2,300 monthly mortgage payments to make. In retirement, they might spend less than the present $450 per month for clothing and grooming and $640 a month for car fuel and repairs.
Triggering savings plans and pensions
Boris and Lynn can smooth their path to early retirement by selling Lynn’s $185,000 in company shares or transferring them in kind. The capital gains on the shares would be taxed, but they could minimize the bill if some of the shares are rolled into an RRSP. The refund based on the market value of the shares could be used to prepay much of their mortgage. We’ll assume that’s what is done. They can use additional RRSP space to shelter dividends from their non-registered shares. Swapping the shares from non-registered accounts to RRSPs will cover taxes on the move and taxes on future dividends, Moran says.
We estimate that Lynn’s CPP will be 78 per cent of the present $13,855 maximum or $10,807 per year and Boris’s CPP will be closer to 85 per cent of the maximum or $11,777 per year. They should start CPP at 65 and Boris’s company pension at 55.
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The couple has $96,000 in TFSAs. They add $400 per month. Much of their current balance is the result of asset value gains within the accounts. They have substantial contribution room. Once their RRSPs are maxed, they can add to their TFSAs, Moran suggests.
If they add $4,800 per year, and the assets return three per cent after inflation, they’ll have $165,573 in eight years. That would support payouts of about $7,360 per year beginning when Boris is 55 for a further 35 years through Boris’s age 90.
The couple’s RRSPs add up to $230,000. Lynn has $96,000 of RRSP contribution room, Boris another $42,000. If they move $138,00 from taxable accounts to RRSPs, the new total would be $368,000. If they then add $11,000 per year (including Lynn’s company match) for 4 years to her age 51 and the balance grows at 3 per cent after inflation for 4 years to her age 55, it will rise to $519,500 in 2019 dollars. If the money then grows at the same rate and is spent over the following 35 years, it would provide taxable income of $24,177 per year.
Their taxable investments total $70,000 plus $185,000 in employee savings, total $255,000. After moving $138,000 to RRSPs $117,000 would be left. If that sum is split to $58,500 each and if Lynn’s employer adds $11,000 per year for four more years and Boris adds $3,600 per year, then after 8 years with 3 per cent growth after inflation, they would have $220,030 in 2019 dollars. That sum would support payouts of $10,240 per year for 35 years to exhaust the account.
Finally, downsizing their house in eight years to extract $250,000 after costs of sale would provide a fund that could generate $11,300 for 35 years to the exhaustion of all income and capital.
The retirement budget
Adding up income components up to their ages 65, they would have Boris’ $39,600 annual company pension income, $24,177 RRSP income, $7,360 TFSA cash flow, $10,240 in taxable income for a total of $81,377 per year before tax. After splits of eligible income and 12 per cent average tax but and no tax on TFSA payouts, the couple would have $6,040 per month to spend, a little below their $75,000 after tax retirement income target. That would not support present spending of $9,325 per month, but Moran suggests that after paying off the mortgage they could reduce expenditures well below that level.
When both partners are 65, they would have Boris’s reduced job pension, $24,000 per year, $24,177 RRSP income, $10,240 taxable investment income, $7,360 TFSA cash flow, $11,300 income from house downsizing, two Old Age Security payments totalling $14,580, and two CPP benefits totalling $22,584. The sum, $114,240 with TFSA income taken out, taxed at an average rate of 17 per cent with TFSA cash flow restored would provide $96,000 per year, far ahead of their goal. “Two incomes and abundant savings. It works,” Moran concludes.
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Financial snapshot 5 Retirement stars ***** out of 5