Money makeover: Retirement-ready?

Sarah and Stephen have plan, but want to ensure savings can support post-work dream


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Sarah and Stephen are nearing a welcome milestone, one for which they've been planning for decades: the day they'll no longer be slaves to the wage.

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Hey there, time traveller!
This article was published 06/07/2013 (3431 days ago), so information in it may no longer be current.

Sarah and Stephen are nearing a welcome milestone, one for which they’ve been planning for decades: the day they’ll no longer be slaves to the wage.

More pointedly, they are within striking distance of executing their retirement master plan.

Sarah, 55, is already retired and collects a defined-benefit pension worth about $20,000 a year.


But Stephen, 56, will still be working for a couple more years as a manager in the civil service, earning $105,000 a year before taxes and deductions.

“We’re hoping to go away anywhere from six weeks to two months every winter, renting a place down south,” says Stephen about their retirement plan.

Part of their plan involves buying a camper and new car when Stephen retires to make those trips to the U.S. With more than $93,000 in short-term savings, in addition to almost $335,000 in RRSPs, tax-free savings accounts (TFSAs) and non-registered investments, the couple say they think they’ve amassed enough wealth to spend about $8,000 to $10,000 a year on vacations when they’re both retired.

Still, they have concerns about how to use their assets in the most tax-efficient way possible in order to make their savings last as long as possible. Currently, they’re considering whether Sarah should begin withdrawing from her RRSP while her income is low. They’ve already moved all their RRSPs into GICs so they can be used in the next few years.

Even if they don’t need the cash, they’ll invest the withdrawals for the long term in their non-registered portfolio of corporate-class mutual funds, which already make up the bulk of their investable assets.

Stephen is also considering what to do with a $51,000 severance he will receive upon retiring and whether he should elect to bridge his pension until he’s eligible for OAS.

“I would get around $150 extra every two weeks until I’m 65,” said Stephen, whose annual work pension income will be about $61,000 without the bridging. “After, I would lose the extra money, plus I’d have to pay back about $80 or $90 every two weeks.”

While the couple says they’re generally confident about retirement, they start worrying when they hear they need at least $1 million to retire comfortably.

“I’m just a little nervous because we’re there already, and we wonder whether we have we set ourselves up properly.” Sarah said.

Retirement-income expert Daryl Diamond says the couple has little to worry about with regard to the $1-million mark. The capital value alone of their defined-benefits pensions is worth about $1.5 million.

Along with their investments, they’ve got almost $2 million in assets that can be used to provide income, says the certified financial planner with Diamond Retirement Planning in Winnipeg and author of Your Retirement Income Blueprint.

“Sarah and Stephen are in an excellent position because they are not carrying any debt; they both have registered and non-registered investments to generate income, and they will have a very good underpinning of guaranteed retirement income from their pensions — one of which is partially indexed — and government benefits,” Diamond said.

From their pensions alone, they will have $5,200 in after-tax income every month. That’s more than $2,000 more than their monthly expenses.

“This surplus should more than cover the costs of spending four to six months down south every year,” Diamond said.

Because their guaranteed retirement income — excluding OAS and CPP — already meets their needs, Stephen won’t need the bridging option for his pension.

Then there’s the question of what to do with his $51,000 in severance at retirement. “Assuming that he can shelter all of this amount through a retiring-allowance calculation and personal contribution room, this would take his total RRSP account up to a total of about $60,000,” Diamond said.

While it would increase their RRSPs — already a tax concern for them — Diamond says they should be able to unwind their registered assets so they can pay as little in taxes as possible.

Withdrawing money from Sarah’s RRSPs before she reaches 60 is definitely worth exploring. Because her income is low now, they can potentially withdraw from her RRSPs at a lower rate than later on when she collects OAS and CPP.

“Given the balance in her RRSP and her current income, she could draw down on her accounts by $20,000 in 2013 and 2014,” Diamond says. “Once Stephen retires, they could look at making smaller RRSP withdrawals until their CPP income starts in a few years.”

As for CPP, Diamond recommends they start it at age 60, which he estimates will be about $600 a month each, if split between the two of them.

They should also split Stephen’s work-pension income once he retires, which will provide them with substantial tax savings.

“When they are both retired, they will have approximately $82,000 of combined pension income,” Diamond says. “Since they are allowed to pension-split these incomes at any age, this means they will each have taxable income of $41,000.”

Based on 2013 tax figures for Manitoba, their marginal tax rate would be below the first federal tax bracket of $43,562, putting their marginal tax rate at about 28 per cent. To get $1 of after-tax income, they would need to receive $1.39 from a taxable source such as an RRSP.

But it’s likely other sources of income — such as CPP — will push their incomes into the 34.75 per cent bracket.

“That same $1 after tax then requires a withdrawal of $1.53.”

A strategy to withdraw from Sarah’s RRSP sooner than later will provide them with more flexibility to keep their taxes low.

They shouldn’t, however, convert the RRSP to a RRIF (registered retirement income fund) early because they’d have to make regular withdrawals instead of having the discretion to withdraw as much or as little as required.

Because they likely won’t need the income, the withdrawn RRSP money can be invested as planned in their non-registered portfolio of corporate-class funds. The corporate-class structure will provide them with a couple of tax-saving benefits. For one, they can tactically switch funds within the corporate-class structure without tax concerns, and the corporate structure — as opposed to the trust structure for normal mutual funds — should help reduce taxes on interest income generated by the fund.

This portfolio setup should serve them well because so much of their savings will be invested in non-registered mutual funds for decades.

That said, they should continue contributing to their TFSAs, reducing the amount of non-registered money sitting unsheltered in savings, which Diamond says “is a little high” at more than $90,000. The majority of this money could be invested for the long term, leaving only enough liquid savings for emergencies, vacations, a camper, a new car and other big-ticket needs with a five-year or less time horizon.

While the challenge prior to retirement is ensuring they save enough, Sarah and Stephen now face an more complicated problem, figuring out how to use their assets to replace work income as tax-efficiently as possible, Diamond says.

“Income planning is not a matter of how assets are invested so much as it is a function of how income is created from assets — for the present and far into the future.”

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