In their mid-60s and no longer enjoying their work, what’s the best way for Tyrese and Miranda to retire?
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In their mid-60s and no longer enjoying their work, what’s the best way for Tyrese and Miranda to retire?
Tyrese and Miranda’s retirement spending target is $9,000 a month after tax. They have three adult children, and a $2.1-million house with a small mortgage in Toronto. The couple would like to give each of their children $100,000 for a down payment on a first home but they’re not sure they can afford it. They’d like to travel more while they are still relatively young and in good health. Neither has a company pension, so the lion’s share of their savings is in their registered retirement savings plans. They could retire immediately and never run out of money, says financial planner Warren MacKenzie, who holds the chartered professional accountant designation. They can take the money from their RRSPs, but by taking it out sooner in the lowest income-tax brackets, he says, they can take advantage of the low rates of tax. If they withdraw the money over three years, they will pay more in tax, but in the long run it would be more cost-effective than adding to the mortgage.
In their mid-60s, Tyrese and Miranda “are closing in on retirement,” Tyrese writes in an e-mail. Miranda is planning to stop working this fall and Tyrese is wondering if he can join her.
They’d like to travel more while they are still relatively young and in good health.
Both have managerial jobs, Tyrese earning $125,000 a year and Miranda $90,000. Neither has a company pension. They have three adult children, one still at home, and a $2.1-million house with a small mortgage in Toronto. They plan to extend the amortization on their mortgage to lower their monthly outlays. They’re open to selling their house and downsizing at some point if necessary.
Ideally, they’d like to give each of their children $100,000 for a down payment on a first home but they’re not sure they can afford it.
They had to tap into their tax-free savings accounts a couple of years ago when Tyrese was in between jobs. So the lion’s share of their savings is in their registered retirement savings plans.
Their retirement spending target is $9,000 a month after tax, or $108,000 a year, adjusted for inflation. “When can we afford to retire?” Tyrese asks.
We asked Warren MacKenzie, an independent Toronto-based financial planner, to look at the couple’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
What the expert says
“Tyrese and Miranda are no longer enjoying their work,” Mr. MacKenzie says. They want to retire as soon as possible and spend more time travelling. They also want to help their children financially now and leave them a little something in their estate.
“Based on their spending goals, they could retire immediately and never run out of money,” Mr. MacKenzie says.
That assumes spending of $110,000 a year plus income tax, an inflation rate of 2 per cent and annual investment returns averaging 5 per cent. It assumes they live to age 100, at which point they’d leave an estate worth about $1-million with today’s purchasing power.
In 2026, their first full year of retirement, their income, adjusted for inflation, would break down as follows: Tyrese’s Canada Pension Plan benefit $15,914; his Old Age Security $8,221; his RRSP/RRIF withdrawal $72,703; Miranda’s CPP $16,229; her OAS $9,076; and her RRSP/RRIF withdrawal $64,167. That adds up to $186,310.
Their cash outflow, adjusted for inflation, would be lifestyle spending of $112,000; mortgage principal and interest of $36,348; and income tax of $37,674, for a total of $186,022. The amount would be lower if they extend the mortgage amortization. Based on the current payments, the mortgage would be paid off in full by 2029.
They saved feverishly and now have $3.5-million. Can Sharon, 62, retire with Craig, 64, next year?
Tyrese and Miranda would like to give each of their children $100,000, which could be used as a down payment on their first home. But they do not have unregistered investments that they could readily sell to generate the $300,000 in cash.
“The funds would have to come from working longer, cashing in some of their RRSPs, or adding to the home mortgage,” the planner says. If they raise the $300,000 by withdrawing from their RRSPs over three years, they will pay income tax sooner than if they increased the mortgage, but in the long run it would be more cost-effective than adding to the mortgage and disbursing all the funds in the short term, Mr. MacKenzie says.
“They can’t avoid the tax if they take the money from their RRSPs, but by taking it out sooner, they can take advantage of the low rates of tax in the lowest income-tax brackets,” he says. “By reducing the value of their RRSPs, they reduce the possibility of Old Age Security clawback in their later years when the minimum withdrawal increases.”
Another alternative would be to downsize to a $1.5-million home, give each child $100,000 and also top up their TFSAs by $100,000, Mr. MacKenzie says.
After making the gift of $300,000, they are still projected to leave an estate of about $500,000, he says.
The children can open First Home Savings Accounts and contribute the maximum, earning tax-free income. The children could also get a tax deduction.
Some of the gift may qualify to go into a child’s RRSP or unregistered investment account.
“Managing these accounts will give the children an opportunity to learn about investing,” the planner says. They’d be making their investment mistakes with relatively small amounts, thereby avoiding the potential greater losses that often occur when an inexperienced investor starts to invest a large inheritance, the planner says.
A common concern for retired people is the possibility that they will incur high health care costs in their later years.
“Tyrese and Miranda believe they have a cushion to address this possibility in their spending target,” he says. For one thing, the mortgage will be paid off. “As people age, they travel less, eat less and spend less on clothes and entertainment,” Mr. MacKenzie says. If they needed assisted living, they would sell their house. The proceeds from the sale would be more than enough to cover the cost of a retirement home.
Laid off with $2.5-million in savings, should Jake and Wanda retire permanently?
Their $1.8-million in RRSP investments is about 75 per cent in stocks and 25 per cent in fixed income. This asset mix is more aggressive than is required to earn an average return of 5 per cent, the planner says. One problem is that they do not know how their investment portfolios are performing compared with the appropriate benchmark. Most professional money managers believe that it’s not possible to manage money wisely without knowing how performance compares with the proper benchmark. Tyrese and Miranda need to ask their adviser for a benchmark performance report or look for an advisory firm that regularly provides this information.
From an income tax point of view, the two most important tax strategies will first be to convert their RRSPs to registered retirement income funds and to split RRIF income so that they are each in the same tax bracket. Secondly, they should ensure that each year they draw sufficient income from their RRIFs to use up the low-income tax brackets.
In summary, when it comes to deciding when to retire, there are two schools of thought, the planner says. Some suggest working longer to build a larger financial cushion in case something goes wrong that could result in running out of money in their old age. Others consider the hidden costs of working longer than necessary – including additional stress from employment, more income tax paid and fewer years of good health to enjoy travel and retirement. “If it appears that retiring now will give one enough to achieve one’s goals, why work longer?”
In Tyrese and Miranda’s case, if they retire and at some point they see that they will be unable to maintain their desired lifestyle, they could easily get back on track by cutting some of their discretionary spending, Mr. MacKenzie says.
Client situation
The People: Tyrese, 64, Miranda, 65, and their three children, 25, 28 and 30.
The Problem: Can they afford to retire this year and still give each of their children money for a down payment?
The Plan: Go ahead and retire. In their first year of retirement, when their income is low, cash in some of their RRSPs to cover the gifts. Convert RRSPs to RRIFs and begin drawing from them. Review their investments to lower risk and ensure proper reporting of investment returns.
The Payoff: Freedom to travel more while they are still in good health, knowing they can always cut back their lifestyle spending later if they have to.
Monthly net income: $14,500.
Assets: Cash $10,000; his RRSP $261,400; her RRSP (including inheritance) $1,540,500; his TFSA $126; her TFSA $1,050; residence $2,100,000. Total: $3,913,076.
Monthly outlays: Mortgage $3,000; property tax $630; water, sewer, garbage $175; home insurance $120; electricity $250; heating $220; maintenance $250; garden $40; car insurance $305; other transportation $520; groceries $1,100; clothing $400; gifts, charity $250; vacation, travel $800; other discretionary $300; dining, drinks, entertainment $1,200; personal care $100; club memberships $220; golf $200; sports, hobbies $100; subscriptions $280; health care $155; health, dental insurance $200; life insurance $200; phones, TV, internet $740. Total: $11,755. Surplus goes to saving.
Liabilities: Mortgage $115,000 at 4.5 per cent.
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