Jodi’s tentative retirement spending goal is $90,000 a year after tax.Sammy Kogan/The Globe and Mail
As she approaches a major turning point in her life, Jodi faces an enviable problem.
“I have saved for over 30 years – all my life in fact – for my retirement,” she writes in an e-mail. In January, at the age of 74, she’ll be “officially retired,” she adds. “I do not have a husband. I do not have a defined-benefit pension. Up until this point, I have been living on a modest income. Now I start spending.”
How much should she draw from her savings each year?
Thanks to rising real estate and stock prices, Jodi has a $2-million house in the Toronto area and a stock portfolio valued at $2.4-million invested in a single mutual fund. She also has some registered investments invested entirely in stock mutual funds.
She does not want to leave a big estate.
At 44 years old, can Taye retire from his government job as early as next year?
Her questions: Is a 40-per-cent portfolio withdrawal rate advisable based on her age and financial goals? How much would she pay in capital gains tax if she decided to cash in her non-registered portfolio at some point?
Not that she intends to sell any time soon. “I have been invested in the stock market for over 36 years and weathered the storms,” Jodi writes. “Down the road I can see the possibility of going into more conservative investments, but until then I’m sticking to my knitting.”
Her tentative retirement spending goal is $90,000 a year after tax.
We asked Warren MacKenzie, an independent Toronto-based financial planner, to look at Jodi’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
What the expert says
Jodi has more than enough to meet her retirement spending goals, Mr. MacKenzie says, but instead of enjoying the fruits of her labour, she is focusing on minimizing income tax and maximizing her investment portfolio.
Despite her wealth, Jodi is concerned about running out of savings. “Life can change in an instant and money can go very fast out the door,” Jodi writes in an e-mail.
In preparing his forecast, Mr. MacKenzie assumes an average annual rate of return of 5 per cent – less than half of what she is getting now – and an inflation rate of 2 per cent. He assumes she spends $90,000 a year, rising to $120,000 a year at age 85 in case she moves to a top-notch retirement home. “If she lives to be 100, she would leave an estate of about $3-million with today’s purchasing power.”
Jodi is in the process of updating her will to decide which charity will receive the bulk of her estate.
How should Vince and Mindy wind down their $500,000 corporate account in retirement?
She could spend substantially more than $90,000 a year and not run out of money, Mr. MacKenzie says. “As it is, she is on track to leave a large estate.”
In 2026, Jodi’s projected cash outflow will consist of $2,000 in interest on a home-equity loan, lifestyle spending of $90,000, a tax-free savings account contribution of $7,000 and income tax of $37,000, for a total of $136,000.
Because Jodi deferred her government benefits to age 70, they are projected to consist of Canada Pension Plan of $12,900 and Old Age Security of $11,600, plus the minimum withdrawal from her registered retirement income fund (RRIF) of $19,700. To make up the shortfall, she will withdraw about $92,000 from her non-registered portfolio, for a total of $136,200.
Jodi’s non-registered portfolio is invested in one stock mutual fund that has earned nearly 12 per cent a year on average since its inception in 1990. Its latest reported holdings were mainly in U.S. high-tech and AI stocks. The fund’s risk profile is high and its trading pattern volatile.
“By being 100 per cent in the stock market, Jodi is taking more risk than is necessary to achieve her goals,” Mr. MacKenzie says. Preserving her capital is now more important than aiming for stellar stock market returns.
To lower her risk and reduce the portfolio’s volatility, it would make sense at some point for Jodi to shift to a balanced portfolio made up of cash equivalents, bonds and Canadian, U.S. and international stocks. She would average close to 5 per cent a year, the rate the planner used in preparing his forecast.
She has no interest in buying an annuity.
Jodi would probably be okay financially even if the stock market crashed and her potential loss greatly outweighed whatever capital gains tax she is worried about paying.
Mr. MacKenzie ran a few numbers to prove the point. Suppose the stock market plunges soon after Jodi retires and her non-registered portfolio is halved.
“If we start the projections with a non-registered portfolio of $1.2-million instead of $2.4-million, and she spends $90,000 a year to age 85 and then sells her house and moves to a retirement home costing $120,000 a year in today’s dollars, she could still leave an estate of more than $1-million at age 100,” Mr. MacKenzie says.
“Is it worth the risk?”
Jodi could lower her risk by raising enough liquidity to set aside, say, three years’ worth of portfolio withdrawals – assumed to be $90,000 a year – in short term, readily cashable investments. That way she wouldn’t be forced to sell stocks in the depths of a bear market.
Jodi has expressed concern about what she calls the “enormous tax liability” she is facing if she cashed out of her non-registered portfolio. It may be less than she fears, the planner says.
“If, for example, she cashed cash in $2-million of her non-registered account in a single year, her tax liability for her income – which would include capital gains, CPP, OAS and RRIF income – would be about $300,000,” Mr. MacKenzie says.
“If she triggered capital gains of $100,000 per year, which would be in addition to her CPP, OAS and RRIF withdrawal, with 50 per cent of the gains being taxable, after the personal and age deductions she would be paying about $13,000 a year in income tax,” he says.
Because Jodi does not need to withdraw additional funds from her RRIF or trigger large capital gains to meet her spending needs, her OAS will not be clawed back and she will not be taxed at the top marginal rate by taking gains of $100,000 a year, he says.
One way to minimize income tax would be to use some of her surplus funds to make charitable donations yearly rather than from her estate. “She doesn’t want to do that because she is concerned about running out of money,” the planner says.
Jodi has a $40,000 home equity loan in which the interest is not tax-deductible. “It would make sense to simplify her life and pay off the loan.” If she chose to, she could pay off the current loan and take out another one where the proceeds could be traced to an investment purchase and the interest cost would be tax deductible, he says.
A lifelong habit of saving is hard to break, Mr. MacKenzie says. “When you’ve been frugal all your life, it’s difficult to shift gears and treat yourself to some luxuries.”
Can Morton, 69, passively rely on his pensions, RRSPs, CPP and OAS and still maintain his lifestyle?
Client situation
The person: Jodi, 74.
The problem: How much should she withdraw from her savings to last a lifetime and yet not end up leaving a large estate?
The plan: Draw the mandatory minimum from her RRIF and supplement the shortfall with withdrawals from her non-registered portfolio. Consider shifting to a more conservative portfolio to better preserve her capital.
The payoff: An orderly drawdown of her savings and investments – plus the comfort of knowing she has more than enough.
Monthly after-tax income: As needed.
Assets: Cash $40,000; non-registered stocks $2,366,000; TFSA $60,000; RRSP/RRIF $346,000; residence $2,000,000. Total: $4,812,000.
Monthly outlays: Property tax $805; water, sewer, garbage $70; home insurance $85; electricity $35; heating $170; maintenance $100; transportation $140; groceries $500; clothing $200; line of credit $180; charity $100; dining, drinks $200; personal care $50; club membership $45; subscriptions $15; health care $290; communications $155. Total: $3,140.
Liabilities: Line of credit $40,000.
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Some details may be changed to protect the privacy of the people profiled.