Experts believe couples can retire this year, but only if they can maintain their current spending.
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Written by Mary Teresa Vitti
James* and his wife Lillian would like to retire at the end of 2024, but only if they can ensure they can enjoy a lifestyle that allows them to enjoy annual trips to Europe and Asia without financial constraints. .
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Lilian, who turns 60 this year, has scaled back part-time to working from home in recent years, giving her more flexibility and a healthy work-life balance. She earns about $25,000 a year.
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Mr. James, 67, has had a highly successful career promoting research and advocacy in both the private and public sectors. He has also cut back on consulting projects, works about 30 weeks a year, and earns $196,100 a year before taxes. His current monthly net income is $8,426 (in total, his current monthly net income is $11,123, but his average monthly expenses are $11,993).
But the hardship and hassle of extensive work-related travel is taking its toll on James. If necessary, he can take on consulting work.
Lillian recently learned that she is eligible for a defined contribution pension worth $109,570 invested in a balanced fund and is wondering whether to move the money to a money market, stock, or bond fund.
“I feel like I ‘found’ the money because it was unexpected,” she said.
James will be eligible to receive a state pension this fall. This is an inflation-indexed contributory defined benefit pension plan that will pay you an estimated $30,028 per year (pre-tax). However, if you continue working until age 70, you will receive an estimated payout of $50,225, and if you work until age 72, you will receive an estimated payout of $62,677.
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“My wife will be 63 at that point, and it will still be a few years before she can enjoy retirement,” he said.
The couple is based in Saskatchewan and recently downsized and purchased a home valued at $850,000 for their retirement. They have a $430,000 mortgage with a fixed rate of 2.74% that matures in December of this year.
This spring, they have $113,000 worth of loan receivables. This money will be used to pay his 10% (allowable annual extra payment amount) on the mortgage and future double payments.
The couple's investment portfolio is worth approximately $2.3 million (approximately $400,000 in unrealized capital gains), the majority of which is invested in stocks (approximately $1.94 million) in registered accounts and managed by a bank-operated securities firm. ing.
The portfolio includes $1.35 million in registered retirement savings plans (RRSPs). Both accounts have 5% invested primarily in North American stocks, mutual funds, and guaranteed investment securities. James and Lillian each have a tax-free savings account (TFSA) worth a total of $256,896, and he has a fixed retirement account worth his $347,827.
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The couple also have unregistered investment accounts worth $154,000, mostly invested in banks and technology companies, with unrealized gains of $80,000.
“From a tax planning standpoint, I don't know what to do,” James said. “Is there a way he can incorporate it into his TFSA?”
James has not applied for Canada Pension Plan (CPP) benefits. Because you don't know the financial pros and cons of taking benefits at age 60, 65, or 70, and you don't know how to maximize your Old Age Security (OAS) and guaranteed income. Compensate your advantage while avoiding or minimizing clawback.
What the experts say
Ed Rempel, a paid financial planner, tax accountant and blogger, thinks James and Lillian could retire this year, but only if they maintain their existing spending, including the roughly $10,000 a year they spend on travel. . Annual income before taxes is $185,000.
“To support their desired lifestyle, which includes more than $15,000 per year for travel to Europe and Asia, they would need approximately $208,000 per year before taxes, or $2.7 million in investments, assuming a long-term rate of return of approximately 7.2 percent. They need dollars. They retire and their retirement rate is 6.5%,” he said. “They only have about $2.3 million. To get back on track, James needs to work two more years until he's 70 and Lillian needs to work until she's 62.”
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But Rempel believes a little creative tax planning can help. Specifically, he suggested couples consider a strategy called the “singleton shuffle” (named after a court case), which allows the mortgage to be tax deductible and frees up funds for travel and investments. are doing.
“In December, James and Lillian used an unregistered investment, a $113,000 loan receivable, and a portion of their TFSA funds to pay off their mortgage, which they were then able to quickly borrow back and purchase a similar investment. Yes, they are all unregistered,” he said. “They will have the same investment and mortgage, but the mortgage interest will be tax deductible, although there is no real benefit in doubling the payments. You'll save $15,000 and get about $10,000 more a year after taxes.”
Regarding Lillian's pension, Lempel said the best option is to move it into a majority investment portfolio and invest it based on your risk tolerance.
“Don't think of it as 'picked up money,'” he says. “Sometimes they want to spend money on big purchases. They need to think of it as part of their retirement nest egg.”
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Lempel says that delaying CPP from age 60 to age 65 provides a lifetime of additional income similar to an annual investment return of 10.4%, but delaying CPP from age 65 to age 70 yields an implied return of only 6.8%. Stated.
“With an asset allocation of 80% stocks and 20% bonds, Lillian should wait until age 65 to start,” he said. “James should start CPP as soon as he retires.”
Lempel also recommends converting your RRSP to a registered retirement income fund (RRIF) when you retire and start taking minimum or higher withdrawals. That way, they would each earn $92,500 a year, and OAS clawbacks would not be an issue. That's because the clawback is 15% on taxable income over $91,000 per year.
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To that end, he proposes collecting most of the difference between pensions and RRIFs, giving each a taxable income of about $85,000 a year. He then withdraws about $10,000 a year from his unregistered investments to achieve his desired retirement cash flow.
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He said: “They should not withdraw from their TFSAs, but should continue to transfer $7,000 a year from unregistered investments into each TFSA, allowing them to make it all tax-free over time.” “For tax efficiency, all unregistered investments should be invested in stocks or equity mutual funds, with the fixed income portion kept in an RRSP.”
*Names have been changed to protect privacy.
Worried about having enough money for retirement? Need to adjust your portfolio? Wondering how to make ends meet? Please contact us at aholloway@postmedia.com with your contact information and a description of the issue. We look for experts to assist you in writing articles about family finance (names will be withheld, of course).
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