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This article was published 18/4/2014 (920 days ago), so information in it may no longer be current.
Charlie was laid off recently and knows his prospects for finding comparable employment in his mid-50s are slim.
A former executive, he still has another year of severance before he has to make a decision: Does he look for work or retire?
With more than $1.2 million in a defined-contribution pension plan, and another $577,000-plus in a savings account, he figures he and his wife, Dee -- who works part-time, earning about $22,000 annually -- should be able to enjoy retirement and plenty of travelling.
"If I do draw down on it (my pension), my projection is I would get $8,000 a month starting in January 2016, if I wanted to wait until then," he says. "At age 100, there would be $104,000 left."
Charlie says he's not worried they will be hard-pressed for cash, even though their retirement income will be less than half of what they're used to. That's because they're savers, and their annual expenses are only about $44,000 a year.
But Charlie has many questions regarding how to best use their considerable assets in a tax-efficient way to leave behind an estate for their adult children.
These include whether to take his Canada Pension Plan early and which assets to draw on first for income. Other questions involve his pension plan.
"Should I stay within the plan, or is there somewhere better to put it?"
Charlie also wonders whether he should convert the pension to an annuity instead of a life-income fund (LIF).
"If I take a variable benefit from a life-income fund, it's not qualified pension income that can be split until age 65."
But annuity income can be split anytime, which would reap them considerable tax savings.
If they choose to manage the pension money on their own, how would they invest it?
It's a question he'd also like answered for the more than $575,000 sitting in low-interest savings.
"I'd like something fairly safe but better than two per cent."
They also have a cottage that's worth $375,000. They are considering selling their city home, living at the cottage in the summer and buying property in the U.S., where they would live during the winter.
To complicate things, Charlie wonders if he needs life insurance.
It's an enviable position to be in, he admits, but the multitude of considerations is overwhelming -- so he wants help.
"There are a lot of questions about succession planning and taxation that simply go over my head."
Certified financial planner Brent Hardman, a senior wealth adviser with ScotiaMcLeod, says Charlie and Dee have no worries when it comes to supporting their lifestyle, even though they're facing a cash-flow reduction of more than 50 per cent, because their current spending is well below what they have earned in the past.
"Their assets will provide sufficient income to life expectancy, based on their budget of $44,000 net spending per year," says the Winnipeg money manager.
"In fact, they can increase this to $50,000 in Year 1, increasing it by three per cent annually to account for inflation -- and still be OK."
With more than $2 million in assets, they also have plenty of flexibility in how they can draw upon their income. As for CPP, they may want to take the pension early. The monthly payment will be reduced by about seven per cent for every year they take it before age 65, but that might be desirable given their situation.
CPP is fully taxable, guaranteed income that will boost their gross incomes and increase their taxes, as well as the clawbacks on their OAS pensions. So taking CPP earlier will likely save them taxes in the long run.
Now regarding what assets to draw on first to fund retirement, Hardman says there are several approaches -- each one has pros and cons.
"Funding retirement early on, I think a good way to structure it would be taking RRSP and LIF income combined with non-registered," he says. "Once he's 60, his CPP can be taken and offset that with a reduction in his RRSP."
But income sources should be examined throughout the year for opportunities for tax efficiency.
"If there's an opportunity to take an additional $5,000 or $10,000 from RRSPs that keeps them under a tax bracket, it should be considered, as taking it later when they are in a high bracket means it will be taxed more."
The other option is to draw on their non-registered, low-interest savings because the withdrawals are not taxable, since they've already paid taxes on the interest earnings.
"This would allow their RRSPs to grow and compound until they need to convert them to RRIFs at age 71," he says.
"In theory, this means they should have more wealth."
The drawback, however, is future RRIF mandatory withdrawals will be fully taxable and since they'll likely be larger, the result could mean Charlie and Dee pay more tax.
As for the LIF versus annuity debate, Hardman says although the annuity offers tax efficiency now because they can split its income, annuity payments are based on current interest rates -- at historical lows -- so they may not get the best value from such a strategy.
Furthermore, once they're both dead, the wealth is gone. As an alternative, they could move the pension money under management outside the plan to develop an investment strategy aimed at providing a combination of steady income and growth.
Hardman says a registered money manager, who has a fiduciary duty to act in a client's best interest, could build them a portfolio of stocks, bonds, funds and other securities that unifies their LIF, RRSP, TFSAs and savings under one umbrella for tax-efficient income and growth.
This would provide them with flexibility to draw income as required and build savings strategically for the estate.
Their properties would also be taken into consideration in the strategy to maximize wealth.
For the time being, the couple has no reason to sell either property because both are easily affordable.
But Hardman says they should be cautious about purchasing U.S. property due to potential tax complications given their considerable assets.
"They might want to consider renting for a few years while researching the ramifications of actually owning real estate," he says, adding they can easily afford to rent a few months each year.
In the long-term, their properties and other assets present a major tax concern, because it's likely they will leave behind a sizeable estate with a potentially large tax bill. As a result, they should consult a tax and estate-planning expert to build a tax-efficient plan.
It's likely life insurance could play a role in the plan.
"Shifting a portion of their non-registered investments to a tax-sheltered vehicle such as a whole life insurance policy is something to consider," Hardman says.
"For estate purposes, to cover the capital gains on the cottage and taxes due on the registered investments, a policy for $500,000 would cost them $5,837 per year assuming good health and non-smoking status."
Otherwise, they would need a rate of return of 15 per cent annually on their investments to offset the potential tax savings associated with an insurance strategy.
It's a lot to contemplate, Hardman says. For that reason, Charlie and Dee should seek professional advice, shopping around for an adviser who can address all their needs.
While they have some difficult decisions ahead, given their considerable wealth, Hardman says Charlie and Dee are in an enviable situation, indeed.