RICHARD and Sharon have a habit of fretting over finances.
"I’m always concerned about it," Richard says.
Their cash anxiety has actually served them rather well over the years.
"I’ve saved all my life," he says.
Both are in their late 50s, recently retired and collecting defined-benefit pensions.
They own a home, carry no debt and have more than $380,000 in RRSPs, tax-free savings accounts and non-registered savings.
Yet they still find themselves a little freaked out about the possibility of having to make their money last maybe four decades or more.
"It’s almost like you save all your life, not treating yourself a whole pile, and now you can — but do we do that?" Sharon says.
Ideally, they’d love to travel — maybe a couple of weeks in the fall and an entire month in the winter.
And they’d like to be able to take their adult children and grandkids along for the ride every once in awhile.
"If someone could say, 'Sharon, you can take your kids away every second year for two weeks all-inclusive, and you’ll still have enough money until you die,' that would be kind of comforting to know."
So far, they’ve lived fairly reasonably well off only their pensions — about $3,674 net combined a month — because their monthly expenses are about $3,728 a month, including about three weeks of vacation abroad.
But they still have a couple of years until they can collect Canada Pension Plan earnings, and they’re reluctant to draw on RRSPs, fearing they might drain them too soon. They also have a whole life insurance policy that is fully paid, and they’re considering using some of the $191,000 policy’s cash value to fund their early retirement instead of relying on their RRSPs.
Yet they are hesitant about that, too.
"We could get a joint annuity from it, or we could borrow against it; those are some of the questions I have," Richard says. "It’s one of the big reasons why we wanted a makeover."
Retirement planning specialist Daryl Diamond says many retirees are likely envious of the position Sharon and Richard find themselves in today.
THEY have no debt, fairly substantial personal assets, insurance that is paid in full and defined benefit pensions that cover the day-to-day expenses as well as additional costs.
"Their pensions provide income that neither one of them can outlive, so first of all, they need not have a fear of running out of money in retirement," says the author of two books on retirement, including Your Retirement Income Blueprint.
Not to mention, those pensions are indexed to inflation and are not reduced once they start CPP or their old age security.
They also have a number of tax advantages to help them make the most of their savings.
They can split their pension incomes at any age. This will help them keep both their taxable incomes below $42,708. Any income at or above that level is taxed at 34.75 per cent as opposed to their current marginal rate of 27.75 per cent. Richard’s pension income is $36,000 and Sharon’s is $17,000, so they have a lot of room before they reach the higher rate.
They say they’ve already been advised by their bank to withdraw from their RRSPs to bring their annual incomes just under the higher rate.
That’s good advice, says Diamond, an adviser with Diamond Retirement Planning in Winnipeg.
All RRSP and RRIF withdrawals are fully taxable, so Richard and Sharon have the opportunity to withdraw their money today and pay less tax than they might pay when they start CPP and OAS, which will inevitably increase their base incomes.
Instead of having to withdraw $1.53 from their RRSP to get $1 of after-tax income, they only need to withdraw $1.38 between $31,000 and $42,707. (Income up to $31,000 is taxed at 25.8 per cent, so they only need to withdraw $1.35 to get $1 of after-tax income.) Diamond says withdrawing today from their RRSP and likely continuing to do so until age 65 will help them save 45 per cent on the taxes they’d pay on withdrawals that push their income above $42,707.
"Yes, this will result in them having more money, after tax, than they need for living expenses, but it is a way to get the fully taxable money out of their RRSP accounts and still have it taxed in the first federal bracket," says Diamond, a Winnipeg-based certified financial planner.
"This strategy is known as 'topping up to bracket.' " Any withdrawals they don’t need can be invested in their TFSAs, providing tax-free income in the future. After they’ve reached their annual TFSA limits, they can invest the rest in non-registered investments.
Because they already have a lot of GICs handy for short-term needs, they should consider investing the excess cash in assets that provide dividends and capital gains, which offer better long-term returns. Furthermore, dividends and capital gains generated from taxable investments are taxed more favourably than interest income.
As for that insurance policy, Diamond says they can take their time deciding how to use it to their greatest advantage. But one option they should take a pass on is taking a lifelong annuity payment because they’d lose the tax-free insurance benefit for their estate, which would help cover taxes. And they already have work pensions and will soon receive CPP and OAS — all of which are guaranteed, lifelong annuities themselves.
One viable option is taking a dividend payment from the contract. Currently, the policy earns a dividend payment that increases the policy’s value. If they took the dividend as income — about $6,000 annually — the policy wouldn’t increase in value, but they’d still be left with a $191,000 benefit.
Another good strategy is borrowing against the policy. This is similar to a reverse home mortgage.
"The amounts loaned are determined primarily by the cash value in the contract plus the age of the policy owner," Diamond says.
They don’t have to pay interest. Instead, interest is capitalized and makes up part of the loan outstanding.
This strategy, however, will likely be more suitable in their 70s because they don’t want to start a loan too early. The longer they have it, the more interest they will owe, which will further reduce the death benefit left to beneficiaries.
But it’s still a good strategy to consider because the loan, made by a financial institution, is tax-free and can be taken annually or as a lump sum.
"By deferring this strategy, it would work well with drawing early on the RRSPs."
In other words, the policy is their safety net in case they do overspend. But it’s more than likely Sharon and Richard have enough savings and pension earnings to enjoy life without worrying about running out of money.
"I would not be in any rush to employ values from the life insurance as both the cash values and the estate benefit will continue to grow quite nicely on a tax-sheltered basis," Diamond says. "I would focus more on looking at drawing on the RRSPs to make full use of the room provided under the first federal tax bracket."