Overview:
This is the first article in a new series, Finance for All, which profiles Canadians across the financial spectrum.
James, 71, and Valerie, 63, are a retired, married couple living in Montreal. The two former graphic designers have four adult children, all of whom are financially independent.
Currently, their income consists of CPP, QPP, OAS, GIS and the Allowance (a GIS-like program for Canadians 60 to 64).
Since James is now 71, he must convert his RRSP to an RRIF by year-end and begin making withdrawals. With this change, the couple is looking to reassess their financial plan.
“We’d like to be able to spend $64,000 a year after tax for at least the next 10 years,” James said. “That includes two trips a year at about $7,000 each. Afterwards, we expect to slow down and hope we can live on $50,000 a year.”
The couple owns a $525,000 home and carry an $82,000 mortgage that renews in two years. They would like to move to a nicer part of the city, and expect the move could cost $100,000. “That may be outside our budget,” James said.
“We’d also ideally like to replace our car in the next several years, at an estimated cost of $35,000,” he said.
Canadian Affairs spoke to Ed Rempel, a fee-for-service financial planner in Toronto who works with clients across Canada. Ed has written about his “8-year GIS Strategy,” which can assist moderate income Canadians in maximizing their retirement benefits.
The financial plan
For the lifestyle that James and Valerie say they want, they will need $74,000 a year before tax for 10 years, then $56,000 a year for the 10 years that they expect to spend less. And they will need $51,000 a year after their mortgage is paid off in 20 years.
Their investments are 60 per cent equities and 40 per cent bonds. Conservatively, that should give them a long-term return of about 5.6 per cent a year.
For this lifestyle, they need about $550,000 of investments. They have $500,000 in retirement investments, so they are 8 per cent short of their goal (excluding the move and the car).
A retirement plan is a long-term projection. Since they are close to their target figure, they could try it and they may well be fine. However, it is advisable to be at least 10-20 per cent ahead of your goal, not 8 per cent behind.
Their options
James and Valerie have several options that could put them on track:
- Reduce their retirement lifestyle:
The first option would be to reduce their retirement lifestyle by just $4,000 a year. They could, for example, reduce their travel budget from $14,000 to $10,000 a year.
To afford a $35,000 car and $100,000 move, they would have to reduce their lifestyle by $20,000 a year before tax for 10 years. That would likely mean eliminating significant travel and a few other expenses.
Financial planning is actually life planning. With specific examples of different lifestyle options, they could choose which option best meets their needs.
- Invest for more growth:
The second option would be to change their investment allocation.
Conventional wisdom says a 60-40 equity-bond split is good for most people. However, studies have shown that a higher allocation to equities has been more reliable in providing for a 30-year retirement. (This assumes it is within their risk tolerance, meaning that they could stay invested even if their investments fall.)
In their case, investing 80 per cent in equities and 20 per cent in bonds would put them on track for their desired lifestyle. Investing 100 per cent in equities would additionally allow them to either buy their car or put $50,000 towards a move.
- GIS Strategy:
It is possible to plan to get a higher Guaranteed Income Supplement (GIS) pension by reducing taxable income. Tax deductions to GIS-collecting seniors can be worth as much as they are to the highest earning individuals.
To collect the maximum GIS of $15,700 a year tax-free, a couple would need to have zero taxable income (excluding OAS and GIS). In James and Valerie’s case, they would need tax deductions to offset their CPP and RRIF income.
Their most obvious deduction is by contributing to their RRSPs. James has RRSP contribution room of $96,094 and Valerie has $91,968. If they contributed the maximum to both their RRSPs and then claimed the deductions optimally, they could get a total of $188,000 tax-free GIS income over the next 7 years.
They could make these contributions by cashing in both of their TFSAs to contribute to James’ RRSP before he converts it to a RRIF. This is the last year they can do this, as no RRSP contributions are allowed after the mandatory RRIF conversion date.
At mortgage renewal time in two years, they could borrow an additional $95,000 to contribute the maximum allowable amount to Valerie’s RRSP.
It may seem odd to increase their mortgage at their age. But they could significantly increase their GIS income while paying only a modest interest rate on the increased borrowing.
This $188,000 tax-free income over seven years would allow them to live their desired lifestyle, and also buy their car and move.
Client situation
Pre-tax assets: James’ RRSP: $184,000; Valerie’s RRSP: $221,000
Post-tax assets: James’ TFSA: $53,000; Valerie’s TFSA: $42,000
All invested assets in 60/40 ETF
House: $525,000
Liabilities: Mortgage: $82,000
Income: Employment income $0.
James’ CPP: $12,130; Valerie’s QPP: $8,013
James’ OAS: $8,355
James’ GIS: $5,368; Valerie’s Allowance: $5,368
Expenses: Estimated monthly expenses: $5,000
Contribution Room: James’ RRSP: $96,094; Valerie’s RRSP: $91,968
James’ TFSA: $59,221; Valerie’s TFSA: $70,283
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