Hector, 60, and Celina, 50, have a mortgage-free house and three young adult children. They also have a vacation condo that is up for sale.JASON FRANSON/The Globe and Mail
After decades of working for the same company, husband and wife Hector and Celina were laid off within months of each other.
Hector is 60 years old, and Celina is 50. They have a mortgage-free house and three young adult children. They have a vacation condo that is up for sale.
Both Hector and Celina will get substantial severance payments, which they plan to live on for the next couple years. As well, Hector has a defined benefit pension of $68,000 a year, partly indexed to inflation.
Celina can either take her defined benefit pension in a dozen years or take a lump-sum cash payment. Her pension is not indexed.
The couple also has defined contribution pensions.
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“With my retirement decision approaching, I’d appreciate some guidance on the best pension option for us,” Celina wrote in an e-mail. She also asked when to start taking government benefits.
Short-term, the couple wants to travel more, help their children and possibly establish a consulting business. Longer-term, they want to give each child $50,000 to $100,000 for a down payment on their first home.
Their retirement spending goal is $155,000 a year after tax, rising with inflation.
We asked Ross McShane, an advice-only financial planner in the Ottawa area, to look at Hector and Celina’s situation. Mr. McShane also holds the chartered professional accountant designation, among others.
What the expert says
Celina and Hector’s tenure with their employers has ended and they are re-evaluating their finances, Mr. McShane says. “Fortunately, their financial situation is solid.” While they are thinking of consulting part time, they have no need to do so.
“It is not a case of whether they have enough, but rather how they will manage their affairs tax-efficiently,” the planner says.
Their spending goal is $155,000 a year, indexed to inflation for basic and discretionary expenses, including travel. “In addition, I have added an annual amount for non-recurring expenses, repairs to the house and vehicle replacement,” he says.
Hector and Celina have a significant amount in their non-registered investment portfolio, which is estimated to be worth $2-million by the end of 2027. That would include the sale proceeds of the condo, their severance pay, and the non-rollable or cash portion of Celina’s pension.
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“Celina has to decide if she should take her pension as a non-indexed income stream of $55,000 a year at age 62, or take the commuted value and transfer it to a locked-in retirement account,” Mr. McShane says. Half of the pension would be rollable to a LIRA and could be drawn down gradually when the account is converted to a life income fund (LIF).
The other 50 per cent will be paid in cash and taxed as regular income along with her salary, which will continue to come in through this spring, the planner says. When the LIRA is converted to a LIF, 50 per cent can be unlocked and transferred to Celina’s registered retirement savings plan.
Leaving an estate is a priority for the couple, the planner says. “Given that Celina’s pension is not indexed, she should consider taking the commuted value and investing it.” This way, the remaining value will be transferred tax-deferred to Hector upon her death and to the estate after he dies.
“They should transfer funds from their non-registered account to their tax-free savings accounts immediately to use up available TFSA room as this turns taxable income into tax-free growth,” Mr. McShane says. A standing order to do this at the beginning of every year should be on file with their investment firm.
They have a mortgage on their vacation condo at 3.85 per cent, which is not tax-deductible. “They are accelerating the payout of the mortgage, which is prudent, as every dollar applied against it results in a guaranteed after-tax return of 3.85 per cent,” he says. The mortgage will be paid out if the condo sells this year.
Celina and Hector will have their severance pay and Celina’s pension payout to provide cash flow this year and next. Starting in 2028, assuming they have no consulting income, they will begin withdrawing from their investments to supplement Hector’s pension.
To cover the gap in what they will need on an after-tax basis, they would withdraw $20,000 from Celina’s registered accounts – RRSP and the LIF – and $100,000 from their non-registered account, for a total of $120,000.
“They will be in the fortunate position where they can smooth out their tax brackets by balancing withdrawals from their RRSPs and LIFs and their non-registered investments,” he adds.
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By 2028, their investment portfolio is projected to be worth $3.6-million, so their required drawdown is modest relative to the size of their portfolio.
They can choose to receive their Canada Pension Plan retirement benefit at 65 or defer it to 70 and receive a 42 per cent enhanced benefit. They can also elect to receive Old Age Security benefits at 65 or defer them to 70.
“Even though they have significant wealth, by managing their tax brackets through a tax-efficient drawdown strategy, they will be able to preserve a sizable portion of their OAS,” Mr. McShane says.
Their goal is to leave an estate of $1.5-million, Mr. McShane says. His projections indicate the couple will have this amount in their TFSAs, in dollars with today’s purchasing power, when Celina reaches age 95. They will also have the equity in the house. The TFSAs will be distributed to their children tax-free.
The planner has developed his forecast on a 5 per cent average annual rate of return, net of fees, based on a balanced growth portfolio and 2.1 per cent inflation.
Celina and Hector should consider gifting funds to their children to set up first home savings accounts and tax-free savings accounts “More parents are making this a priority these days, given the challenges for young people raising the necessary funds to purchase their first home,” Mr. McShane says.
Integrating the after-tax proceeds of the severance pay, the cash payout of Celina’s pension and the condo sale proceeds into their portfolio “will need to be carefully evaluated in light of the fact that many analysts think that stock markets are overvalued in certain areas,” he cautions.
They have a portfolio manager charging a fee that starts well above 1 per cent of assets under management, and is tiered down to just over 1 per cent on the incremental investment balance, he says. “Given the size of their portfolio, the fee should be less than 1 per cent inclusive.”
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Client situation
(Income, expense, asset and liability numbers provided by applicants.)
The people: Hector, 60, Celina, 50, and their three children, 19, 20 and 23.
The problem: Can they retire comfortably on what they have? Should Celina defer her pension or take a lump-sum cash payment and invest it?
The plan: Celina takes the lump-sum cash value of her pension. They use up their unused TFSA contribution room. They give enough money to their children to set up FHSAs and TFSAs.
The payoff: Goals achieved.
Monthly after-tax income: As needed from severance pay.
Assets: Her stock $55,000; his stock $10,000; joint non-registered investment portfolio $1,078,318; joint cash $30,000; her TFSA $70,000; his TFSA $67,500; her RRSP $32,000; his RRSP $75,500; her defined contribution pension plan $475,000; his defined contribution pension $355,000; vacation condo $525,000; residence $700,000. Total: $3,473,318.
Estimated present value of his defined benefit pension: $1.1-million (planner’s estimate). That’s what a person with no pension would have to save to generate the same income.
Current monthly outlays: Property tax $400; water, sewer, garbage $100; home insurance $100; electricity $250; heating $250; maintenance $300; garden $20; transportation $560; groceries $1,250; clothing $200; help for their children $1,500; charity $200; vacation, travel $2,500; other discretionary $500; dining, drinks, entertainment $1,350; personal care $150; club memberships $120; sports, hobbies $150; subscriptions $100; other personal $150; health care $170; health, dental insurance $350; phones, TV, internet $280; TFSA $150. Total: $11,100.
Liabilities: Condo mortgage $230,739 at 3.85 per cent.
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