Malcolm is worried about what will happen if something happens to his wife, Paula, after he retires.Amber Bracken/Globe and Mail
At 48 years old, Malcolm’s short-term goal is to retire early from a stressful career as a first responder. His wife, Paula, also 48, no longer works and has stayed home for many years to raise their two children, ages 13 and 10. “When the COVID-19 pandemic first started, she was kept away from returning to her job,” Malcolm wrote. By email.
Mr Malcolm is “heavily leaning” towards retiring in mid-2024.
“We have taken a common-sense approach of living within our means, investing, saving, emergency funds, paying down our mortgage, and staying out of debt,” Malcolm writes. Malcolm has a defined benefit pension and will pay $72,500 per year.
The problem is that the indexing of his pension won’t start if he retires next summer, it will be accumulated from the time he retires until age 60, and then payments will start. “Our retirement goal is to maintain our current lifestyle and spending, which is about $48,000 per year, plus travel and activities, until indexing and Canada Pension Plan and Retirement Security benefits kick in. Add $20,000 a year.”
Malcolm also receives a $20,000 annual disability pension from the government. He worries about how Paula will cope “if something were to happen to me after I retire.”
We spoke with Gordon Stockman, a Certified Financial Planner at Efficient Wealth Management in Mississauga, and Ahmed Mahyan, a Certified Financial Planner at NextGen Financial Planning, also in Mississauga. , asked about Malcolm and Paula’s situation. Mr. Mahyan also holds the Chartered Financial Analyst (CFA) designation, and Mr. Stockman also holds the Certified Professional Accountant (CPA) designation.
expert opinion
If Malcolm and Paula want to retire in July 2024, they can afford to spend their goal of $68,000 a year, planners said. Malcolm’s annual pension of $72,500 and tax-free disability benefits of $20,000 will cover most of his expenses until his death. “There is little need to tap into their savings,” the planner says. “The financial plan is easily sustainable as long as Malcolm is alive.”
To optimize taxes, they recommend splitting Malcolm’s income from his work pension with Paula. He can split it up to 50 percent, and their incomes will then be equal. CPP and OAS benefits cannot be split. Therefore, a careful withdrawal strategy is required when liquidating registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). “The goal is to make their incomes roughly equal and minimize the overall tax burden for the household.”
Malcolm is concerned about the rate of inflation between the ages of 49 and 59 as he waits for his pension sliding scale to start. The savings they’ve built over the years in RRSPs, tax-free savings accounts, and non-registered accounts are more than enough to cover him. Planners say cash flow shortages are possible during this period. After age 60, all of Malcolm’s retirement income sources are indexed to inflation.
Planners assume a long-term inflation rate of 3%.
Malcolm and Paula primarily invest in high-dividend blue chip stocks of large Canadian companies. Planners say it may be better to focus on a portfolio’s total return.
Most of their assets are in registered accounts, so they don’t take advantage of the dividend tax credit. “Therefore, you need to have a good handle on where your assets are so you can optimize your taxes during the asset accumulation phase.” If possible, all dividend-bearing Canadian stocks are invested in non-registered accounts. Growth stocks, such as foreign and US stocks, should be held in the TFSA, and bonds and investment securities should be invested in the TFSA, along with US dividend stocks. RRSP.
Planners say Malcolm and Paula need to properly assess their risk tolerance to find the right asset allocation. “In the model plan, for a portfolio of 60% stocks and 40% bonds, the assumed return on investment is 4.66%, or 5.66% excluding investment fees.”
Mr Malcolm will be eligible to receive the maximum amount of CPP if he retires next year. Because Paula has not worked for a sufficient period of time, she is eligible for a reduction in her CPP benefits. If you delay receiving benefits until age 70, you would expect your CPP to increase by 42% and your OAS to increase by 36%. Cash flow shortfalls from age 65 to his 70s can be covered with withdrawals from RRSPs, non-registered accounts, and TFSAs. To minimize taxable income, the liquidation order also allows him to combine RRSPs and unregistered savings.
Malcolm and Paula had created a will and power of attorney in 2002, before their children were born. Planners recommend updating these documents to reflect your current financial situation and future aspirations.
In this base scenario, Malcolm and Paula’s net worth would be projected to steadily increase from $1.2 million to $2.5 million at age 70. Then, once his government benefits begin, they increase rapidly, significantly increasing his cash flow during retirement. Their estimated net worth could be $8.9 million at the age of 95. “The default assumption for life expectancy is 95 years unless there is a specific reason to do so.”
What would happen if Malcolm died prematurely?
“Given Malcolm’s generous pension plan and tax-free disability benefits, the base case looks very rosy,” Stockman and Mahyan say. However, if something were to happen to Malcolm, things would get significantly worse. Since Paula will only receive half of Malcolm’s pension and her disability pension will be suspended, she will need to liquidate her registered assets (RRSP and TFSA) faster to make up for the cash flow gap.
For example, if Malcolm were to die prematurely at age 60, Paula’s income would be significantly reduced. Although she is entitled to CPP survivor benefits, she will also lose her OAS benefits. “However, the sum of her CPP survival benefits and Paula’s own CPP benefits cannot exceed one person’s maximum CPP,” the planner notes. They assume that her retirement spending will be reduced by 10 percent in this scenario, but this may be offset by the potential increase in Paula’s future medical expenses.
Malcolm has a $358,000 life insurance policy that, if successful, will be paid out at age 60. This amount will be invested in a non-registered account and his TFSA. In this scenario, his RRSP withdrawal of $30,000 per year would increase slightly each year from age 60 to age 70 to keep up with inflation. “That way you can keep your taxes even over the years.” Cash flow gaps can be made up through non-registered accounts and TFSAs.
Paula’s net worth will be approximately $2 million at age 70 and $2.5 million at age 95. A significant portion of the net worth will be tied up in the marital home.
“Given this situation, it is very important to properly analyze your insurance needs,” planners say. One concern may be that Malcolm’s disability may make him uninsurable. Assuming Mr. Malcolm qualifies for additional insurance, planners say having enough coverage until age 70 will give him the peace of mind he’s looking for.
Client situation
Participants: Malcolm (48 years old), Paula (48 years old), and their two children (13 and 10 years old).
The question is, if travel spending increases, will Malcolm be able to retire by age 49? Will Paula be financially okay if something happens to Malcolm?
Plan: Retire on schedule next year and defer CPP and OAS benefits until age 70. If possible, take out sufficient term life insurance so that Paula can live comfortably if something happens to Malcolm.
The result is peace of mind that you can enjoy the best parts of life for years to come.
Monthly net income: $8,600.
Assets: $47,000 in cash and equivalents. Joint unregistered investment $52,000. His TFSA is $112,000. Her TFSA is $126,000. His RRSP is $133,000. Her RRSP is $173,000. Registered Education Savings Plan $89,000. Housing costs $470,000. Total: $1,113,000.
Malcolm’s pension: Immediate lifetime annuity and bridge benefit until age 60 of $72,550. After age 60, the benefit increases with inflation, and the bridging benefit stops at age 65. Malcolm also receives $20,000 in lifetime tax-free Veterans Affairs disability benefits, which are indexed. .
Estimated present value of his pension plan: Planner declined to provide.
Life insurance: Malcolm $358,000. Paula’s price is $40,000.
Monthly expenses: Property taxes $387. Water, sewer and trash $380; home insurance $108. Heating is $110. Security is $10. Maintenance fee $40. Garden is $15. Transportation fee: $585. Groceries cost $750. Clothes cost $150. A gift of $280. Vacation, travel $300. Eating out is $200. Drinks are $80. Entertainment $160. Beauty $80; Sports and Hobbies $80. Subscription fee is $10. $20 for doctors and dentists. Health and Dental Insurance $209. Life insurance $55. Disability insurance $80. The phone costs $55. Cable is $65. TV and Internet $140. Registered Education Savings Plan $412. TFSA, contributions from non-registered accounts $3,033. Pension plan contributions are $1,200. Total: $8,995.
Debt: None.
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