Bob and Mavis’s retirement spending goal is $72,000 a year after tax, not including their charitable giving and payments on a mortgage taken out for investments.Darren Calabrese/The Globe and Mail
Bob and Mavis had well-paying careers and generous defined benefit pension plans.
“Now, mostly retired, we are looking at making the best of the end of our lives,” Bob writes in an e-mail. They are both 75 years old with no children and no family in Canada.
Bob’s defined benefit pension is paying $114,096 a year and Mavis’s $72,228, indexed to inflation.
They have a duplex in Eastern Canada valued at $1-million and about $5.5-million in investments.
“Since our financial needs are very modest, we have decided to give a significant amount of money to various charities every year, and hope to continue that as long as possible,” Bob writes.
They donate about $300,000 a year to various charities and plan to continue giving as long as they can.
“In the future, if we need medical and physical support, our family cannot easily step in. In the short term, our church will help, but we need a long-term solution.”
Because they donate so much to charity, their tax burden is low. They have transferred securities to charities, which avoids capital gains. “With the tax credits, we have also been able to move significant funds out of our registered retirement income funds (RRIFs) without a tax penalty.”
How soon can Simon, 49, and Samantha, 45, retire?
Bob has $175,000 left in his RRIF while Mavis has $103,000.
Their retirement spending goal is $72,000 a year after tax, not including their charitable giving and payments on a mortgage taken out for investments.
Their main concern is estate planning: They ask how to find the appropriate people or organizations to act as powers of attorney and executors of their estate. They also want to simplify their investments and “possibly engage a professional because we are getting older,” Bob writes. They are “bulking up” their cash position because they fear an economic crash.
Adding to their income, they each get $13,920 a year from an annuity and Mavis also gets $25,200 a year from her father’s trust.
We asked Warren MacKenzie, an independent Nova Scotia-based financial planner, to look at Bob and Mavis’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
What the expert says
Bob and Mavis offer an excellent example of how to make the most of their surplus wealth, Mr. MacKenzie says.
“They have a successful record as do-it-yourself investors,” the planner says. Now they want to simplify their lives and plan for the eventual distribution of their assets. The balance in their estate will go to charity.
“Assuming a 5-per-cent annual rate of return with 2-per-cent inflation, if they continue as they are, they are on track to leave an estate of about $8-million in dollars with today’s purchasing power,” Mr. MacKenzie says. That’s based on lifestyle spending of $72,000 a year and charitable donations of $300,000 a year.
They want to be sure that if in future they are unable to make sound financial decisions, someone who is committed to looking after their best interests will manage things for them, the planner says.
How can Mandy, 64, and Syed, 65, make the most of their hard-earned savings in retirement?
“Given that they do not have family in Canada, they should speak with an estate lawyer and tax accountant,” he says. They may want to appoint a trusted younger friend, a professional such as their lawyer or accountant, or a trust company to act as power of attorney for their medical, housing and health care decisions.
“If they want additional assurances, they could require that the individual or firm with power of attorney be required to run all decisions past a trusted adviser.”
They could also consider setting up an alter ego or joint partner trust so that a trustee could manage their assets and protect them against mismanagement or fraud, the planner says. This kind of trust allows individuals aged 65 or older to transfer assets during their lifetime while retaining control. Their bank should register a “trusted contact” person who would be contacted if a questionable transaction were being contemplated.
As well, the couple should update their wills and appoint a corporate executor.
In their wills they should specify which charity or charities will be the beneficiary. They could consider having someone from the charity act as a trusted adviser to approve the decisions made by the person or firm who has power of attorney.
Can Moira, 57, retire in three years and still leave an inheritance for her kids?
As to their investments, their holdings are too complicated, Mr. MacKenzie says. They have nine different investment accounts and more than 100 investment positions, with some positions held in multiple accounts.
“A more simplified portfolio would include two RRIFs, two tax-free savings accounts and one joint non-registered account,” Mr. MacKenzie says. “By using a few asset allocation exchange-traded funds, they could have better diversification than they have now.”
With a half-dozen asset allocation ETFs, they would have a portfolio that is easier to manage. The asset allocation ETFs follow a disciplined rebalancing process.
“Individuals can expect better results by following a disciplined investment process rather than trying to find the best investment product,” the planner says.
Mavis is not involved with the investing process so if they want a hands-off approach they could request, and compare, proposals from three investment management firms, Mr. MacKenzie says. This would be helpful in case Bob were to become unable to manage the portfolio.
The $395,000 mortgage they took out to invest generates very little yet adds to the complexity of their financial situation, the planner says. The mortgage rate is 3.97 per cent and proceeds are held in a guaranteed investment certificate yielding 5 per cent.
Bob and Mavis are in the process of reducing their exposure to stocks and moving to cash because they fear a major stock-market crash, the planner says. “Stock markets are near their highs so a major downturn is certainly possible.” Their asset mix is about 40-per-cent cash and GICs and about 60-per-cent mostly Canadian stocks.
“The best plan is to set their exposure to stocks at the level necessary to achieve their goals,” he says. “They should first decide on the amount they want to leave to charity, then target the rate of return needed to achieve that goal even if they live to age 100.”
Can Neetu retire before 65 and still give her daughter a big inheritance?
The couple are in the fortunate position of having indexed pensions that are more than enough to maintain their lifestyle even if their entire investment portfolio was wiped out, Mr. MacKenzie says. If that happened, they would have to reduce their annual charitable donations.
Bob has been donating securities to charity for tax credits. If the couple wanted to make a larger donation of securities this year to lower their market exposure, it is worth noting that tax receipts for such donations can be carried forward for up to five years, Mr. MacKenzie says.
For 2027, Bob’s projected cash flow will be: defined benefit pension $118,900, Canada Pension Plan $17,100, RRIF withdrawal $10,600, annuity income $13,900, rental income $7,400, and interest and capital withdrawals $90,000.
Mavis’s cash flow will be: defined benefit pension $72,900, CPP $16,400, RRIF withdrawal $6,100, annuity income $13,900, rental income $7,400 and taxable inheritance $25,500 from a trust account. Cash receipts total $399,800 and their Old Age Security is entirely clawed back.
Cash outflow consists of basic lifestyle spending, rising with inflation, of $73,500, donations of $306,300, income tax of $5,700 and transfers to TFSAs of $14,000, for a total outflow of $399,500.
Is it realistic for Ferdinand, 51, and Alice, 50, to retire in a few years?
Client situation
The people: Bob and Mavis, both 75.
The problem: How to find someone to manage their affairs, including investments, in case they are no longer able to do so. How to choose a suitable executor.
The plan: Update wills and consider a lawyer or accountant to act as power of attorney. Appoint a corporate executor. Update their financial plan to show how much more they could contribute to charity.
The payoff: Ensuring their wealth is distributed according to their wishes.
(Income, expenses, assets and liabilities provided by the applicants.)
Monthly after-tax income: As needed, $6,000.
Assets: Bank account: $10,000; GICs $590,440; stock portfolio $3,272,290; mutual funds $160,000; savings accounts $1,168,245; cash in investment account $306,660; residence $1,000,000. Total: $6.5-million.
Estimated present value of Bob’s defined benefit pension: $2-million; Mavis’s DB pension $1.1-million.
(That’s what someone with no pension would have to save to generate the same retirement income.)
Monthly outlays: Mortgage $2,290; property tax $740; water, sewer, garbage $50; home insurance $150; electricity, heat and car $135; maintenance $620; transportation $175; groceries $335; clothing $15; zero-interest car loan $655; gifts $490; vacation, travel $965; other discretionary $200; dining out $30; sports, hobbies $300; subscriptions $100; health care $435; communications $145. Total: $7,830.
Liabilities: Mortgage $395,000 at 3.97 per cent; interest-free car loan $12,000.
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Some details may be changed to protect the privacy of the people profiled.