Can Wilbur, 60, and Patsy, 55, afford to retire next year and gift some money to their daughter?

Can Wilbur, 60, and Patsy, 55, afford to retire next year and gift some money to their daughter?
Open this photo in gallery:Can Wilbur, 60, and Patsy, 55, afford to retire next year and gift some money to their daughter?

Wilbur and Patsy’s spending goal is easily achievable, Mr. Fennessy says. If they spent no more than $100,000 a year, they’d leave an estate of about $6.85-million, the equivalent of $2.9-million in today’s dollars.Todd Korol/The Globe and Mail

Early years working in the Far North and a high-paying job in transportation have enabled Wilbur to amass substantial savings for his family.

Wilbur is 60 years old and earning about $190,000 a year. His wife, Patsy, is 55 and earns about $50,000 a year in the not-for-profit sector. They have one child, age 12.

Wilbur would like to retire next spring. While he does not have a defined benefit pension plan, he has an employee savings plan to which his employer contributes.

“For our present assets, I would credit early savings and compound interest, no mortgage or other debt followed by some decent income years,” Wilbur writes. “We’re careful savers and we’ve been lucky, maybe stingy in some areas,” he adds. “We have 18-year-old cars and a good-sized veggie garden.”

They are completing an energy retrofit, adding a heat pump and enough solar panels to sell power to the electrical grid.

Can Wilbur and Patsy retire in March with an after-tax spending power of $100,000 a year?

We asked Trevor Fennessy, a certified financial planner and associate portfolio manager at CWB Wealth Partners in Calgary, to look at Wilbur and Patsy’s situation.

What the expert says

Wilbur and Patsy’s spending goal is easily achievable, Mr. Fennessy says. If they spent no more than $100,000 a year, they’d leave an estate of about $6.85-million, the equivalent of $2.9-million in today’s dollars.

That assumes they live to be age 95, their spending rises in line with inflation of 2.1 per cent, they earn a rate of return on their investments of four per cent and the value of their house rises by one per cent a year.

Even with a zero real rate of return (2.1-per-cent inflation rate and 2.1-per-cent return), their investable assets could still support their initial spending goal, the planner says. If they chose to spend all their savings, leaving only the value of their home, they could increase their spending to more than $150,000 a year.

Knowing their budget is so flexible should give them peace of mind, Mr. Fennessy says. Their income will provide a cushion for lump-sum expenses such as additional travel, long-term care or medical expenses. They can easily afford to help their child with a down payment on a first home or wedding expenses when the time comes.

Between the child’s trust fund and her registered education savings plan (RESP), her education is well-funded, the planner says. He recommends Wilbur and Patsy continue with their RESP contributions to capture any remaining Canada Education Savings Grants available, up to the lifetime maximum of $7,200. These grants will be taxable in the child’s hands when withdrawn. Because her income is likely to be quite low while she is in school, she may pay little or no tax on these withdrawals, he says.

When their daughter begins postsecondary education, Patsy and Wilbur are encouraged to draw down the RESP to ensure all funds are withdrawn from the account, Mr. Fennessy says. With the newly introduced First Home Savings Account, they could consider drawing down the RESP account more rapidly and contributing these funds to an FHSA in their daughter’s name. Since contributions to the FHSA are tax deductible, they will help to offset any increase in their daughter’s taxable income from drawing down the funds more rapidly.

Within their portfolio, Wilbur and Patsy are overweight cash. They are planning to use it to buy Canadian stocks or stock funds to generate tax-efficient, eligible dividend income in their taxable accounts.

“Due to the gross-up of dividend income, it is likely that this will jeopardize most if not all of Wilbur’s Old Age Security benefits because he holds most of the non-registered assets,” the planner says. This will dictate when Wilbur decides to apply for OAS. “Depending on portfolio performance and positioning over the next five years, Wilbur will need to revisit his OAS benefits closer to age 65 to see when he can capture the most value.”

Patsy is likely to receive her full OAS benefits throughout retirement. This will only change if Wilbur predeceases her and she is then required to report all income from their portfolio.

As for when and how to draw down their savings, if longevity is on their side, leaving the funds to grow tax-deferred within the registered accounts is likely to outweigh any benefit from withdrawing funds from the accounts before age 72, Mr. Fennessy says. “If the goal is to optimize their after-tax estate at age 95, only the mandatory minimum withdrawals should be taken from the registered accounts,” he says. Because Patsy is younger, Wilbur can benefit from basing his withdrawal factor on Patsy’s age, further reducing the amount that will need to be withdrawn annually.

Alternatively, if they have health concerns, accelerated withdrawals from the registered accounts could become beneficial, the planner says. “For withdrawals taken after the age of 65, it would be best to convert a portion of their RRSPs or locked-in retirement accounts to RRIFs or life income funds (LIFs),” he says. This will allow Wilbur and Patsy to take advantage of pension income splitting, provide access to the federal pension income deduction, and reduce their withholding tax requirements. The minimum withdrawals can come out their RRIFs or LIFs without withholding tax.

Because there is a large discrepancy between Wilbur and Patsy’s CPP benefits, it will be beneficial for them to apply for CPP sharing, the planner says. Service Canada will allocate the payment amounts based on the period that Wilbur and Patsy lived together during their contributory period.

If Wilbur and Patsy both defer CPP to age 70, this would provide a net increase in their estate of more than $150,000 at age 95.

With a surplus of assets built up in their estate, there are some strategies that they can explore when planning their legacy. Wilbur and Patsy should be keeping their TFSAs fully funded throughout retirement.

If they donate securities in-kind that have appreciated in value to charity, they will receive a charitable donation receipt for the full market value of the securities, while forgoing any tax on the capital gain. These in-kind donations can be made throughout their lifetime or upon their deaths to provide tax savings within the estate.

Wilbur and Patsy should consider advanced gifting to their heirs. In their base-case scenario of spending $100,000 a year, their assets will continue to grow, but the tax liability will grow as well. As their daughter gets older, it will be crucial to look at their wealth from a generational perspective. Using funds that will ultimately be taxed in their estate to help their daughter purchase a home, top up her TFSA, or pay down debt, will protect more of their family’s long-term wealth.

Wilbur and Patsy could consider buying life insurance to address their estate tax liability. “There could be an opportunity to use life insurance as a tool to help cover off a portion of the growing estate tax liability or to fund a charitable bequest that would provide a tax credit for the estate to offset the final tax bill,” the planner says.


Client situation

The people: Wilbur, 60, Patsy, 55, and their child, age 12.

The problem: Can Wilbur and Patsy afford to retire soon with $100,000 a year of after-tax spending power? How should they draw down their savings?

The plan: Because they have more than enough savings, they might want to consider advance gifts to their daughter. They might also want to explore drawdown and estate-planning strategies to help them save tax.

The payoff: Money well spent.

Monthly net income: $14,075.

Assets: Joint cash $21,000; her cash $41,000, his non-registered portfolio $2,052,000; her non-registered portfolio $180,000; child’s trust funds $125,000; his TFSA $113,000; her TFSA $103,000; his RRSP $1,263,000; her RRSP $239,000; his locked-in retirement account from previous employer $47,000; her LIRA from previous employer $73,000; registered education savings plan $66,000; residence $614,000. Total: $4.94-million.

Monthly outlays: Property tax $335; water, sewer, garbage $150; home insurance $150; electricity and heat negligible; maintenance, security $135; car insurance $150; fuel $100; oil change, maintenance $60; groceries $2,200; clothing $200; gifts $200; charity $300; vacation, travel $1,300; dining, drinks, entertainment $300; personal care $50; pets $280; sports, hobbies $200; doctors, dentists $400; drugstore $120; health, dental insurance $180; phones, TV, internet $315; RRSP contributions $2,585; RESP $210; TFSAs $1,085. Total: $11,055.

Liabilities: None.

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Some details may be changed to protect the privacy of the persons profiled.