Jerry and Mel have money problems a lot of people would wish for. The couple is nearing retirement, one that entails condo living on the West Coast.
But they're having trouble coming up with a working plan to use their considerable assets to fund their lifestyle while preserving wealth.
"It was almost easier having less money because there was less responsibility and managing of the finances," says Mel, 49.
Both work in management in the public sector, earning $130,000 a year each, and they expect significant monthly incomes from their pensions when they retire.
Jerry, 59, expects to retire at the end of 2014 and will earn about $6,000 a month. Mel will get $2,500 a month at age 55, but she plans to retire a couple of years early so the two of them can move out west and start retirement as soon as possible.
"We've toyed with Mel retiring at 53 and taking money out of the RRSP for income," Jerry says.
At the moment, they're both contributing the maximums to their RRSPs and TFSAs. They have about $230,000 in their RRSPs and about $30,000 each in their TFSAs.
They also own three condos, one in Winnipeg and two on the coast.
"We're selling one we've had for a few years and decided to move up to the forever condo because we intend to retire there," Jerry says.
"So we bought the new condo without selling the other one first because we have the ability to carry the debt for a time, but we'd like to sell the old one as quickly as we can."
They're paying $2,500 every two weeks on a line-of-credit debt -- $375,000 -- that they used to buy the new condo and will use the proceeds from the sale of the other to pay down what they owe on the new one.
"That should leave us owing about $165,000," Mel says. "Then we work really hard to get rid of that debt."
While they're not concerned about whether they can afford early retirement, the couple finds it challenging managing all the moving parts to their finances -- the pensions, CPP, the RRSPs, TFSAs, etc.
"It's a funny thing to bellyache about, but when we didn't have very much money, we would just spend it and it was gone," Mel says. "Now I can see how wealth management becomes a responsibility."
Certified financial planner Bob Challis agrees the couple has a lot of options when it comes to figuring how to use their considerable assets to fund their retirement in a tax-efficient way.
"But make no mistake," says the adviser with Nakamun Financial Solutions in Winnipeg, "they're in very good shape."
Even if they live well into their 90s, they're likely to have a substantial net worth exceeding more than $2 million, largely because their work pensions -- a combined net present value of about $1.5 million -- and CPP should more than fund their lifestyle.
"They did not state what kind of retirement income they'd like to have, so I took the approach of what kind of income it looks like they're going to have in retirement," he says. "I came up with more than $100,000 of after-tax income a year."
Incidentally, he adds, they will keep about 10 per cent more after taxes by moving to B.C. because of a lower tax rate there.
"When you look at their budget, their actual cost of living is less than $50,000 a year -- excluding debt and the cost of carrying two additional condos -- so they will have a lot of additional cash flow."
Long story short, Mel and Jerry will be accumulating money during retirement, more than enough to maximize their TFSAs.
"Really, the question is do they want to pay the tax during their lifetime or do they want to pay the tax when they're dead? The bill is bigger the longer they defer it, but the reserves are greater."
If they want to reduce taxes early on, Challis says Mel should retire at age 53 instead of 54 because it will provide her with more opportunity to draw down her RRSP at a lower tax rate before she begins collecting her pension. She might even consider deferring her pension a few years longer to exhaust her RRSP money entirely.
Jerry's RRSP is likely to be taxed heavily no matter the strategy, and OAS clawbacks are inevitable at some stage, at least for a few years.
Any further RRSP contributions should be made to a spousal account in Mel's name.
They also need to talk about what they want to happen to their wealth after they're gone.
"While they're both alive, it's easy: Leave whatever's left over to the surviving spouse, and that survivor will probably want to hold onto the available capital for security purposes to get advanced care with age, but they probably can't use it all up while alive, so there will likely be a puddle of money that has to be left to somebody or some organization," he says.
"In the final analysis, any money that's left over when you die should be in a TFSA because there's no taxation whatsoever."
But it's likely they'll have assets that far exceed what's in those accounts.
One option is an insurance product that is a hybrid between an investment account and a death benefit.
"What I see in this situation is a need for some kind of tax-preferred capital accumulator, which is a little bit of an exotic name," he says. "What would end up happening is that there's a very good rate of return somewhere in the range of five to six per cent annually that accumulates and is untaxed as long as it remains in the account."
This money is accessible while they're living, with only earnings being taxable on withdrawal. Upon death of the last spouse, the benefit would be paid tax-free and could help reduce the estate's tax liability.
In addition, this kind of product will reduce taxes from investment income while they're living because they would be moving a lump sum of their non-registered capital into this account, where earnings on it grow tax-free without affecting OAS, triggering clawbacks.
Needless to say, the couple requires advanced wealth-preservation planning going forward.
"Like Mel said, having some money is a responsibility," he says. "This couple is relatively nouveau riche and they would significantly benefit by paying a fee to a professional who can do the calculations to forecast what happens if they pull this or that asset lever too soon or too late."