Hey there, time traveller!
This article was published 24/1/2015 (911 days ago), so information in it may no longer be current.
Calvin and Rhonda love to travel, but they know their window of opportunity for travelling is limited. The couple in their early 80s are in good health and have comprehensive travel insurance so they can spend a week or two exploring the world beyond Canada's borders.
But unlike past years, they've been thinking about splurging this year.
Their problem is finding the money to do it. The couple lives on a limited income, relying mostly on Rhonda's pension worth about $32,000 a year, which she splits with her husband.
They also split her CPP, about $465 each a month.
Outside these sources and OAS, the couple have about $25,000 in savings -- some of which they want to use for a trip.
Rhonda is contemplating collapsing her RRIF, about $10,000, to pay for their travel plans.
"If I take out at least $5,000, we could have a better holiday this year while our health is good," says the retired educator.
But she worries about taxes.
"My annual income last year was $45,781, and splitting pension income brings it down so my taxes owing, usually about $400," she says.
"But if I added $5,000 to my income, it'd be more like $50,000 and I don't know if that's wise."
Despite the fact the withdrawal would eat up a big portion of their savings, Rhonda says that's not a concern at this stage because they always have their home -- worth $400,000 -- as a backup plan.
That said, they would be reluctant to use a reverse home mortgage to access its equity, and they don't want to downsize either.
"But costs keep going up and I find our disposable income is shrinking, which is a big problem because we live within our means, but I would like to do a little more travelling while we still can," Rhonda says. "So our primary question is should I withdraw from my RRIF now or let it sit?"
Certified financial planner Karen Diamond with Diamond Retirement Planning in Winnipeg says Calvin and Rhonda should think carefully about the consequences of using their limited savings to fund a big holiday.
"No one could blame them now for wanting to spend money to travel and enjoy themselves while they still can, but their limited cash resources don't allow for any extras, and various contingencies loom larger every day," she says. "Any of a number of things could derail the status quo and, together or alone, they might find themselves up against a wall financially."
So far the couple have been fortunate to avoid major expenses that would have put pressure on their cash flow and savings, but that can change, so it's important to always have an eye on preserving wealth.
To that end, collapsing Rhonda's RRIF or even withdrawing $5,000 -- more than is required by RRIF withdrawal rules -- would be an inefficient use of their wealth.
"My advice would be to leave it as it is because any lump sum withdrawals will attract taxation of almost 30 per cent on the money -- $5,000 is only worth $3,500 after tax, for example -- so it especially makes no sense to cash it in."
While Rhonda has to withdraw fully taxable amounts from the RRIF annually, it's best to only take what's required under the rules, and split the amount with Calvin to reduce taxes and preserve as much wealth as possible.
As an alternative, the couple could use other savings sources to pay for their vacations, but they need to consider the 'what if' scenarios. Because most of their income is derived from Rhonda's pension, it's likely their savings could come in handy in the future, especially if she predeceases Calvin because he will only receive 50 per cent of her pension while still largely having the same expenses.
Although Rhonda indicated this isn't a worry because they can always downsize, Diamond says they should consider an alternative strategy that could provide cash flow for their needs -- be it a little travel or emergencies.
Diamond says an all-in-one account is a hybrid of home equity line of credit and a savings account that would offer them more efficient way than other means to tap into their home's equity if they so choose.
"I would agree with Rhonda that a reverse mortgage is not a solution for them," she says. "In my opinion, reverse mortgages are too inflexible and expensive and may be better suited to someone who absolutely needs to use their home equity to provide a lump sum of cash, or future income stream."
That's not the case for Calvin and Rhonda, but they do need more financial flexibility and an all-in-one account offers just that.
"Usually, no set monthly payment is required; they would just have income deposited to the account and expenses going out with interest on any negative balance posted at the end of the month," Diamond says.
While they should work with an adviser to make sure this type of strategy works for them, an all-in-one account may be a good fit because they live within their means. In other words, they're less likely to overspend and have long periods where they're dipping into their home equity, triggering interest costs.
Of course, the couple could always access their non-registered savings to fund their vacations with no tax consequences.
But Diamond says an all-in-one account is worth considering if they want to stay in their home, travel a little bit more and prepare for future contingencies.
"Planning measures at this stage should help to make things as easy as possible when the inevitable occurs so it's a good idea to put as much on autopilot as possible, so they don't have to worry about unexpected expenses or changes in income," Diamond says. "This strategy could reduce the stress of worry about income and cash flow and help them enjoy life to the fullest while they have their health and each other."