Vince and Mindy’s retirement spending goal is to maintain their standard of living adjusted for inflation.Todd Korol/The Globe and Mail
Vince and Mindy are both 65 years old and recently retired. They have an adult daughter, a mortgage-free house in Alberta and substantial savings and investments.
“I operated a professional firm for the past 15 years or so,” Vince writes in an e-mail.” I would pay myself what I needed and leave the rest in the corporation’s account.”
Their plan was to keep paying themselves dividends from the corporation until the funds were exhausted, after which they would start collecting government benefits and drawing on their registered retirement savings plans.
But they sold a rental property in January for $400,000. Because of the impending capital gains tax on the proceeds, they’ve decided not to withdraw from the corporate account in the current year, so the sale proceeds will be their only income source for 2025.
Their question: “What’s the best plan for winding down our corporate account and the various registered accounts to minimize taxes and avoid any Old Age Security clawback?” Vince asks.
Their retirement spending goal is to maintain their standard of living adjusted for inflation.
We asked Matthew Ardrey, a portfolio manager and senior financial planner at TriDelta Private Wealth in Toronto, to look at Vince and Mindy’s situation. Mr. Ardrey holds the certified financial planner and advanced registered financial planner designations.
What the expert says
Vince and Mindy have a combined $220,000 in tax-free savings accounts and $1,411,000 in RRSPs, Mr. Ardrey says. Vince has $315,000 in a locked-in retirement account, for a total of $1,946,000 in personal investment assets.
They also have $500,000 in their corporate account, which they want to wind down over the next few years.
Apart from the corporation, which holds cash equivalents, the remainder of their portfolio has allocated 30 per cent to cash and equivalents, 30 per cent to Canadian stocks and 40 per cent to U.S. stocks.
As an aside, Vince, nervous about the stock market, sold off their stock holdings early in the year and bought GICs. He’s moving back into the market as the GICs mature so he has requested that Mr. Ardrey base his forecast on the couple’s previous personal asset allocation of 30-per-cent cash and equivalents and 70-per-cent stocks.
Vince and Mindy also have $257,000 in their bank account, of which $150,000 is earmarked for a home renovation this year and $50,000 to pay capital gains tax. “Because renovation costs often overrun estimates, it is assumed these funds do not factor into their retirement projections other than to pay these costs,” the planner says.
Are mid-30s newcomers Rafael and Lucia on track to buy a detached home for their young family?
The couple’s primary goal is to maintain their standard of living, the planner says. He assumes the couple’s nearly $94,000 in annual lifestyle expenses, excluding savings, rise in line with inflation, which he estimates at 3 per cent a year. The assumed rate of return on their investments once their previous portfolio is fully restored is 5.16 per cent. The planner further assumes both Vince and Mindy save the maximum each year to their tax-free savings accounts.
A secondary goal is to avoid or at least minimize the clawback of Old Age Security. “This will require planning on how to wind down the corporate and registered assets to keep them below the OAS clawback threshold,” Mr. Ardrey says.
The first step is to defer Canada Pension Plan and OAS benefits to age 70. “This will allow them to draw upon other assets to fund their lifestyle at a lower tax rate, and also increase the amount of government benefits they get,” he notes.
To achieve their goals, Vince will start by unlocking his LIRA and moving 50 per cent to his RRSP, Mr. Ardrey says. The remaining half will go to a life income fund, or LIF. Vince will then take the maximum withdrawal in 2026 from the LIF.
“In addition, they will take $100,000 per year from the corporation, split equally between them,” the planner says. “This should exhaust most of the corporate assets by the time they start taking CPP and OAS.”
They should discuss with their accountant if they have any balances available in the corporation’s capital dividend account or general rate income pool, the planner says. Amounts paid out of the CDA are not taxable, while those paid out of the general rate income pool are taxed as eligible instead of ineligible dividends. Payments from either of these sources would further lower their personal tax rate.
“Based on these assumptions, they can meet their primary retirement goal of spending at least $94,000 a year after tax, rising in line with inflation,” Mr. Ardrey says.
Can Morton, 69, passively rely on his pensions, RRSPs, CPP and OAS and still maintain his lifestyle?
To fully understand the risk, the planner ran a Monte Carlo simulation, which introduces randomness to a number of factors, including returns. “In this plan we have run 1,000 iterations with the software,” he says.
“We look at the 75-per-cent and 50-per-cent levels to determine where risk due to return-rate variance may affect the success of the plan.” If it is 75 per cent, then they will probably be successful. If it is 50 per cent, it is in a cautionary range. And if it is less than 50 per cent, then there is material risk of failure.
In this stress test, the results were positive, with a 98-per-cent success rate, Mr. Ardrey says. Holding 30-per-cent cash equivalents will allow them to draw on these assets in times when markets are down.
They also have almost a 100-per-cent chance of success on the OAS clawback goal, the planner says. There are only two years with a minimal clawback for Vince, about $250 in 2029 and $1,600 in 2030. “Despite their success with their future financial situation, I would recommend reviewing their portfolio construction,” Mr. Ardrey says.
For their portfolio, there is no bond component. Adding some bonds or bond funds would increase the overall portfolio return, he says. As well, they have no allocation to stocks outside North America. “They should look to have some investments in the Europe, Asia and Far East geographic region.”
Client situation
The people: Vince and Mindy, both 65.
The problem: How to draw down their corporate and registered assets in the most tax-efficient way, avoiding the OAS clawback.
The plan: Vince unlocks his LIRA, puts half in his RRSP and the other half in his LIF, drawing on the latter. They draw $100,000 a year from their corporate account until it is gone and they defer government benefits to age 70.
The payoff: A plan that keeps taxes to a minimum.
Monthly after-tax income: $10,850.
Assets: Bank accounts $257,000; corporate account $500,000; his TFSA $120,000; her TFSA $100,000; his RRSP $950,000; her RRSP $461,000; spousal RRSP $48,000; his LIRA $315,000; residence $750,000. Total: $3.5-million.
Monthly outlays: Property tax $395; home insurance $130; utilities $255; heating $130; maintenance, garden $300; transportation $450; groceries $300; clothing $50; gifts, charity $100; vacation, travel $4,000; dining, drinks, entertainment $350; personal care $20; club memberships $600; subscriptions $50; other $40; health care $70; health, dental insurance $180; communications $405; TFSAs $1,165. Total: $8,990.
Liabilities: None.
Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the people profiled.