JENNIFER ROBERTS
When they bought their seasonal dwelling on a small lake in 1987, Betty and Blair's dream was to sell their suburban house and retire to cottage country once they stopped working. Well, that day came sooner than they expected. However, everything worked out fine just the same, thanks to soaring Toronto-area house prices.
"After many years of unassuming careers in finance, my wife and I were downsized in 2015 and subsequently shown the exit door," Blair writes in an e-mail. He is 57. His wife, Betty, is 53. Fortunately, they have a fair amount of savings. "We always managed to save for a rainy day and lived within our means for decades," Blair writes.
Their new lakefront home (they tore down the original cottage) will be finished this fall at a cost of slightly more than $400,000, Blair adds. They paid for it from their combined severance packages "and our years of accumulated savings." They sold off much of their non-registered investment portfolios to help pay for the construction. Their plan now is to sell their Toronto-area house – which has risen in value over the years to $920,000 – and live off the substantial net proceeds. Their retirement spending goal is $50,000 a year.
At age 65, they would begin collecting their workplace pensions ($650 a month for him and $420 for her) and government benefits, drawing on their tax-free savings accounts and registered retirement savings plans as needed.
"This post-work reality is both thrilling and terrifying at the same time," Blair writes. "Can we retire now? Can we stay retired?"
We asked Warren MacKenzie, a principal at HighView Financial in Toronto, to look at Blair and Betty's situation. HighView is an investment counselling firm.
What the expert says
Blair and Betty have been left unemployed and wonder whether they need to look for work or if they can just relax and enjoy their retirement now, Mr. MacKenzie says.
"Given the unexpected downsizing, they are fortunate in two ways," he says. "First, they've always lived modestly, and they've been good savers." They have also benefited from the real estate boom, the planner notes. "They'll be selling their city home for $920,000 and moving to their new, debt-free waterfront home in cottage country." The planner notes they expect to net about $870,000 from the sale of their Toronto home.
Their registered savings, plus the tax-free profit on the sale of their city home, will give them substantial assets to invest, Mr. MacKenzie says. "With Canada Pension Plan benefits, Old Age Security and modest pensions – and assuming a 4 per cent average annual rate of return on their investments – they don't need to work and they won't run out of money," he says. "In fact, the projections show that their real net worth will be growing every year."
They have two main questions: Should one or both take early CPP; and is their plan to live on the proceeds from the sale of their city house and let their RRSPs grow in value the best strategy?
In a nutshell, living off the sale proceeds until the money runs out in 15 years or so is not a tax-efficient strategy, Mr. MacKenzie says. While their RRSPs may well rise substantially in value over the years, "this strategy will mean that future RRIF withdrawals will be much larger and so will be taxed at a higher rate," the planner says. Taxpayers must convert their RRSPs to RRIFs at age 71 and begin making minimum withdrawals at age 72. This may also mean their Old Age Security benefits will be clawed back because of their high income, Mr. MacKenzie says.
"A more tax-efficient strategy is for each of them to start immediately to withdraw about $40,000 per year from their RRSPs," the planner says. "Because their only other income will be investment income, with a $40,000 RRSP withdrawal, they each will pay only about $7,000 of income tax," he says. "If they leave the RRSPs and allow them to perhaps double in value, the mandatory minimum withdrawals will be double." RRIF withdrawals would be on top of their pension, CPP and OAS benefits – which they would begin collecting at age 65 – and would therefore attract income tax at a much higher rate.
"By delaying taking CPP until they are 65, a lot of the money they draw from their RRSPs will be taxed at a lower rate than would be the case if the RRSP money was taken out and added to the income from private pensions, CPP and OAS. By drawing down their RRSPs before they have other sources of income, most of their RRSP withdrawals will be taxed in a lower income-tax bracket," he says. As well, by delaying CPP, the benefits will be higher than if they took it at age 60. "By using up their RRSPs before they start to draw CPP and OAS, they will be able to remain in a relatively low tax bracket for the rest of their lives."
Once they have sold their city house, they should use some of the proceeds to pay off their debts and top up their TFSAs, Mr. MacKenzie says. They might also consider insurance to cover critical illness and long-term health care.
As for their investments, they enjoy stock picking but they are not measuring their results against a benchmark. If they did, they might decide to switch to professional investment management or an online portfolio manager or robo-adviser, he adds. Without a formal investment policy statement, they may be tempted to make emotional decisions during market swings. They could also be taking more risk than necessary to achieve their goals.
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CLIENT SITUATION
The people: Blair, 57, and Betty, 53.
The problem: Can they afford to retire now or do they have to look for work?
The plan: Sell the city house, move to the country house. Draw on RRSPs first to keep future tax bill lower.
The payoff: A more financially comfortable retirement than they may have anticipated.
Monthly net income: Variable
Assets: City house $920,000; country house $475,000; actual commuted value of their defined benefit pension plans $205,000; bank accounts $7,500; his TFSA $7,600; her TFSA $500; his RRSP $385,000; her RRSP $501,000; his stocks $500; her stocks $2,000. Total: $2.5-million.
Monthly disbursements: Property tax $450; transportation $600; car loans $1,000; line of credit $200; telecom, TV, cellphone $300; home insurance $295; medical, dental $110; vehicle insurance $265; city utilities $300; country utilities $130; sports, entertainment, dining out $400; gifts, charity $130; groceries $950; pets $200; subscriptions $100. Total: $5,430.
Liabilities: Car loans $58,000; line of credit $10,000. Total: $68,000.
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