Sydney would like to retire 10 years from now to spend more time with his soon-to-be retired partner, Darnell.Laura Proctor/The Globe and Mail
Sydney, who is 39, hopes to retire early to spend more time with his partner, Darnell, who is 66.
Darnell is planning to retire by year-end. As well, they have a child who will turn 7 soon and they plan to pay for his higher education.
Sydney earns $150,000 a year in the finance industry while Darnell earns $150,000 a year in communications. They share ownership of a house valued at $1.4-million with a mortgage of $382,000.
Darnell has a defined-benefit pension that will pay $57,600 a year, indexed to inflation. He also has a $1.2-million registered retirement savings plan. Their retirement spending goal is $100,000 a year after tax, rising in line with inflation.
Sydney asks whether he can afford to retire in 10 years or so “to spend time with Darnell while he’s young and able,” he writes in an e-mail. What steps can they take to ensure they are well prepared financially?
We asked Ian Calvert, head of wealth planning at HighView Financial Group in Oakville, Ont., to look at Darnell and Sydney’s situation.
What the expert says
Darnell and Sydney have accumulated substantial investments, including about $400,000 each in their tax-free savings accounts – “a great accomplishment,” Mr. Calvert says.
Darnell is retiring this fall and Sydney would like to retire 10 years from now. “They have a 27-year age difference, so Sydney’s early retirement at 50 is their primary financial goal,” the planner says.
After Darnell retires, they will still be in a positive cash-flow position thanks to his pension and Sydney’s income. With Sydney’s income of $150,000 a year and Darnell’s pension of $57,600 a year, they will have a gross family income of $207,600.
This should give them enough cash flow after taxes to cover mortgage payments of $44,820 a year and their lifestyle expenses of $100,000.
Although their expenses will be covered plus a small buffer, Darnell should think about a strategy for his $1.2-million in RRSP assets, the planner says. In any scenario, having the correct beneficiary in place is important. “Given the size of Darnell’s RRSP and the big difference in age, Darnell should ensure Sydney is listed as the successor annuitant on the account.” This will ensure the remaining RRSP assets can be transferred to Sydney on a tax-deferred basis when Darnell dies. “With the age gap and the size of Darnell’s RRSP, there is a high probability these assets will be funding Sydney’s retirement after Darnell dies,” the planner says.
How can Mandy, 64, and Syed, 65, make the most of their hard-earned savings in retirement?
Darnell should consider getting a small head start on his RRSP withdrawals. The years between 2027 and 2031 will undoubtedly be the lowest-income years for Darnell. These are the years before he converts his RRSP to a registered retirement income fund and begins making mandatory minimum withdrawals at the age of 72.
As well, his income will rise when he begins collecting government benefits at 70. “At age 72, his minimum RRIF withdrawal is projected to be $82,500 of taxable income,” the planner says.
Assuming Sydney is still working, there would be no benefit to Darnell splitting any income with Sydney through eligible pension splitting.
From 2027 to 2031, Darnell’s income is estimated to be about $60,000 a year between his pension and some small investment income. He could withdraw up to $30,000 from his RRSP in these years to have the funds taxed at a favourable rate, Mr. Calvert says. His marginal tax rate would be 29.65 per cent and his average tax rate would be about 19 per cent. “He could use the surplus funds to max out both TFSAs or comfortably add some additional expenses.”
This head start would also lower Darnell’s minimum RRIF withdrawals at 72 to about $74,000.
When Sydney retires in 2036, a few things will happen, the planner says. If they follow the same mortgage payment schedule, the mortgage would be eliminated in 2036, “which is ideal timing with Sydney’s retirement and the loss of his income,” Mr. Calvert says.
When he retires, Sydney should convert his RRSPs to a RRIF and his locked-in retirement account to a life income fund (LIF) and start minimum withdrawals, the planner says.
“In their first year of being retired together, they will have combined gross income from all sources of about $219,600 with inflation,” he says.
This total income, less $46,000 in income taxes payable, will provide enough after-tax cash flow to meet their indexed lifestyle spending of about $126,000 a year.
“Based on this withdrawal plan, they could comfortably spend more and never worry about the longevity of their assets or Sydney’s early retirement,” Mr. Calvert says.
Should Renata, 75, downsize and pay off her reverse mortgage to leave money for her sons?
When Darnell is 90, they will have the future value of their real estate; his RRIF, projected to be $850,000; plus a combined $3-million in TFSA assets. That assumes they contribute $7,000 a year to their TFSAs and that they can achieve a 5-per-cent rate of return on average.
They also asked about home renovations and car replacements over the years. These items would be one-time costs outside of their estimated general expenses. With the size of their TFSAs and their non-registered savings, the planner says, they shouldn’t worry about these one-time or occasional big expenses because their investments are not required for their annual retirement cash-flow needs.
“If possible, they should use their non-registered assets first for big expenses and preserve the TFSA assets, assuming they can raise the funds without incurring a large capital gain.”
Client situation
(Income, expenses, assets and liabilities provided by the applicants.)
The people: Sydney, 39, and Darnell, 66.
The problem: How to position themselves so that Sydney can join Darnell in retirement. How best to draw down their savings.
The plan: When Darnell retires later this year, he should draw down his RRSP first.
The payoff: Not having to pay more tax than necessary.
Monthly after-tax income: $18,000.
Assets: Cash in bank $95,000; non-registered investments $145,000; Sydney’s TFSA $402,000; Darnell’s TFSA $400,000; Sydney’s RRSP $420,000; Darnell’s RRSP $1,200,000; Sydney’s LIRA $85,000; Sydney’s defined contribution plan $10,000; registered education savings plan $41,000; residence $1.4-million. Total: $4,198,000
Estimated present value of Darnell’s defined-benefit pension: $760,000. That is what someone with no pension would have to save to generate the same retirement income.
Monthly outlays: Mortgage $3,500; property tax $790; water, sewer, garbage $35; home insurance $85; electricity $120; heating $100; maintenance, garden $250; transportation $315; groceries $600; child care $500; clothing $100; gifts, charity $300; vacation, travel $600; other discretionary $100; dining, drinks, entertainment $700; personal care $30; club memberships $235; pets $200; sports, hobbies $50; subscriptions $50; other personal $50; health care $420; communications $210; RRSP $2,000; RESP $165; TFSAs $1,165. Total: $12,670
Liabilities: Mortgage $382,000 at 4.05 per cent.
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