Hey there, time traveller! This article was published 20/6/2015 (822 days ago), so information in it may no longer be current.
Jack and Chrissie don't want to winter in Mexico. They have no desire to own a condo in Phoenix, and sunning themselves in Florida is out of the question.
Instead, they plan to rent a lot for their trailer in Manitoba during the summer. It's a simple retirement plan they believe matches their modest savings of more than $400,000 mostly invested in GICs.
"I am contemplating retirement in the next year and want to make sure that we have enough money before I stop working," says Chrissie, 60, currently earning about $38,000.
Jack, 63, is already retired with CPP and RRIF (registered retirement income fund) withdrawals of less than $15,000 a year. Chrissie also draws $300 a month from a RRIF.
While the couple expects they can fund expenses of $3,000 a month once they're both receiving old age security, they will have to rely more on savings before she turns 65.
"I want to make sure we can fund that shortfall when I retire," she says, adding her CPP will be about $500 a month if she retires soon.
"My worry is burning through too much of our savings because I want to leave something for our children who do not have work pensions either," she says. "They're in middle age now and have not been saving as much as they should, so they will need all the help they can get."
Chrissie adds she will work longer if it is needed.
"We're not fancy people, but I want to make sure we have enough to support a moderate lifestyle."
And while she doesn't have longevity in her family, Jack does.
"My husband's family lived until their early 90s, so this money has got to last a long time"
Certified financial planner Karen Diamond with Diamond Retirement Planning in Winnipeg says Jack and Chrissie have a good mix of registered, non-registered and tax-free savings — essential to getting the most out of their money.
"With the right combination of tax-free or tax-effective income from non-registered savings and TFSAs, and fully taxable RIF, CPP and OAS income, they can generate maximum cash flow with minimum taxation."
They will be able to take advantage of a number of tax credits that will keep more of their withdrawals from savings in their hands once they both are 65.
"The federal and provincial personal amounts, age amounts and pension income amounts are such that they should be able to receive a base of about $26,000 of household income that is not subject to taxation," she says "Then, they need to work within the marginal tax brackets and the age amount threshold (reduced when net income exceeds about $35,000) to make sure they are paying as little tax as possible on the income they receive."
If Chrissie retires before 65, Diamond suggests they consider relying less on their RRIFs and more on their TFSAs to help cover costs until she receives OAS.
In fact, the TFSAs could replace the current RRIF money Chrissie is drawing, too.
"They may be better off to set up their TFSAs to deliver a tax-free source of income instead of using the RRIF."
At a minimum, they're losing 20 per cent to taxation on RRIF money. It's probably even more once their tax picture is completed at the end of the year.
"This erodes their savings unnecessarily."
But if they do draw on their TFSA, they will need to invest in assets other than low-yielding GICs. A good alternative is fixed-payout income funds.
"This special type of mutual fund is designed to pay out a fixed amount of cents per unit per month," she says. "They would not be cashing in units to create the cash flow, and the payment would not be affected by the market value of the units."
Generally yielding about four per cent without eroding capital, this type of investment would generate enough cash flow to at least reduce their reliance on RRIFs until Chrissie turns 65.
"But the caveat is that not all of these funds have the proven management that can strike a payout which can be sustained through all types of markets," she says.
"It's important to do your research."
When done properly, this strategy would allow their registered money to grow a little longer — safe from taxation — while also preserving their TFSA capital.
Once both are retired, they can stop drawing on the TFSAs and resume withdrawals from registered assets. At that point, the TFSAs can be left to grow in value for their estate, providing a tax-free source of cash for their children.
"While they are both living, they will name each other as the successor holder, but the last survivor can then name their children as the beneficiaries," Diamond says. "All the growth in the TFSA will be tax-free to the estate, and naming them as beneficiaries on the accounts will make it more efficient to transfer that money to their benefit without having to go through the will (and being subject to probate fees)."
And if Jack and Chrissie are able, they may over time be able to transfer a substantial portion of their $95,000 in non-registered, taxable savings to their TFSA.
This depends on their ability to manage costs while striking a balance between conserving capital and getting a reasonable return on their money.
"As a rough estimate, a sustainable withdrawal rate should be something in the neighbourhood of maybe one per cent more than the rate of return they are realizing on their RRIF portfolios when they are starting to draw in their early 60s."
Moreover, they need to keep an eye on inflation — usually around two per cent. Any returns on their investments need to at least keep pace. For example, if they require a two per cent return on their asset, they would really need a return of four per cent so they do not lose buying power as the price of necessities increases.
"They do have some rainy day money put aside, but is it enough?" she asks, referring to their non-registered and TFSA assets. Another concern is when one of them dies. While costs will be reduced, so too will income because OAS will be cut in half. And CPP — although the survivor is eligible for an enhanced benefit — will also be less.
Still, Jack and Chrissie appear to have enough assets to achieve their goals, but they should work with their adviser to develop a detailed financial plan.
"They need to map out their retirement income so they have a benchmark and checkpoints along the way to know if they are on track as things change and unfold," Diamond says. "And in the short term, Chrissie should plan to work a little longer to bridge the time to when they have all the tax and income benefits of being age 65."