What steps can Lewis and Liza take to get adequate cash flow when they start retirement?



Lewis and Lisa.Tijana Martin / The Globe and Mail

At first glance, Lewis and Liza seem like a typical professional couple who are thinking about retirement. He is 60 and earns $ 135,000 a year working in financial services, she is 58 and makes $ 92,000 a year in health care. They have a 25-year-old child and a home in the suburbs of Toronto.

But Lewis is a great investor. Over the years, sometimes working as a consultant and sometimes as an employee, Lewis built up a $ 2.9 million registered retirement savings plan filled with U.S. tech stocks. He started with around $ 100,000, transferred from a pension plan outside of Canada to his RRSP when the family moved here.

In an email, Lewis says he’s just an “average dumb investor who has had some luck.” His great luck was buying Apple, Amazon, and Google years ago. “My three biggest holdings contributed to the biggest gains in the portfolio,” Lewis writes. Its strategy has been to invest in the US market, in “really strong technology stocks”.

With the family’s fortunes secured, Lewis and Liza search for a financial plan for their retirement. They want to hang up their hats soon with a purchasing power of $ 9,000 a month after tax. About $ 400 per month will be used to help their families back home.

“What steps can we take to get adequate cash flow for ages 60 to 70? Lewis asks. They plan to postpone the Canada Pension Plan and Old Age Security to 70 years. He also asks if it is possible to withdraw earlier from their RRSP / registered retirement income funds and income splitting strategies to reduce taxes. They both have defined benefit pension plans.

We asked Matthew Sears, vice president and financial planner at TE Wealth Investment Advisor in Toronto, to review Lewis and Liza’s situation.

What the expert says

Lewis and Liza’s goal of retiring in about a year is easily achievable, Sears says. “They might even consider retiring at some point in 2022 if they choose to do so.” They would still leave a significant estate to their son, as well as funds available for charitable contributions upon their death.

“Their maximum spend for a sustainable lifestyle is $ 142,560 per year in 2021 dollars,” the planner says. This gives them great flexibility in terms of spending, so that if they needed to help their families more than they already are, they can afford it, he adds.

In preparing his forecast, Sears assumes the couple will retire in January 2023 and live to be 95. Lewis receives 63 percent of the maximum CPP benefit and Liza 58 percent, from age 70. By postponing their benefits, they will get 42 percent more than if they had taken them at age 65. It is expected that their Old Age Security benefits will be fully clawed back. It assumes an average annual rate of return on their investments of 5 percent and an inflation rate of 2 percent. They would contribute the maximum (currently $ 6,000 per year each) to their tax-free savings accounts for the rest of their lives.

As they retire in 2023, their DB retirement income will not be enough to meet their cash flow needs, Sears says. Lewis is entitled to a pension of $ 1,835 per month, non-indexed to inflation, with a bridge benefit of $ 190 per month until the age of 65. Liza will receive $ 2,270 per month, indexed, with a bridge benefit of $ 220 per month.

“They should consider withdrawing some of their RRSP accounts to help fill this shortfall,” says the planner. “In those early years, they would both have to withdraw from their RRSP accounts to keep similar tax brackets,” Sears said. (Lewis’s RRSP account is much larger than Liza’s, but until Lewis turns 65 and converts his RRSP into a Registered Retirement Income Fund, or RRIF, his withdrawals will not qualify as pension income. splitting.) When Lewis turns 65, Liza can forgo withdrawing from her RRSP account and allow Lewis to draw the extra income they need from her RRSP / RRIF. They will make the pension splitting election on their tax returns.

In the first year of retirement, they’ll want to have about $ 73,000 in taxable income each to cover their $ 112,805 expenses, according to the planner. For Lewis, $ 24,300 would come from his DB pension plan and $ 48,770 from his RRSP account. For Liza, $ 29,880 would come from her DB pension and $ 43,220 from her RRSP. They could then use their non-registered taxable account to fund their TFSA contributions. They should continue to contribute to the TFSA and maximize accounts throughout retirement, he says.

Alternatively, during those early years of retirement, they could withdraw additional funds from Lewis’s RRSP each year to cover TFSA contributions, Sears says. This would bring his taxable income to about $ 91,000 per year to cover contributions. This amount is still significantly lower than what his income will be once he starts withdrawing the minimum requirement from his RRIF.

According to projections, they will leave a heritage of $ 3.3 million in investment assets plus their primary residence.

Client situation

The people: Lewis, 60; Lisa, 58 years old; and their son, 25

The problem: Nothing, really. Find the best way to save money while minimizing taxes.

The plan: Tap into their RRSPs / RRIFs as soon as they retire to supplement their retirement income. At 65, Lewis can share his eligible pension income with Liza.

The reward : A solid retirement plan

Monthly net income: $ 13,995

Assets: $ 4000 bank account; $ 1.5 million house; cryptocurrency $ 45,000; his $ 2.9 million RRSP; his RRSP $ 355,000; unregistered shares $ 153,000; his TFSA $ 55,000; his TFSA $ 62,000; estimated present value of his pension $ 313,010; Estimated VA of his pension $ 503,805. Total: $ 5.89 million

Monthly expenses: Mortgage $ 2,835; property tax $ 580; water, sewers, garbage $ 170; home insurance $ 385; electricity, heating $ 240; maintenance, garden $ 135; transportation $ 1,100; groceries $ 600; clothing $ 125; $ 300 line of credit; gifts, charity $ 60; vacation, travel $ 500; highway tolls $ 200; meals, drinks, entertainment $ 405; personal care $ 25; $ 10 hobby; subscriptions $ 40; family support $ 400; health care $ 180; communications $ 435; TFSA $ 500; contributions to the pension plan $ 480; group benefits $ 320. Total: $ 10,025

Liabilities: Mortgage $ 36,300; $ 3,500 line of credit. Total: $ 39,800

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Some details can be changed to protect the privacy of those profiled.

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