The Canadian Financial Summit kicks off this week. Kyle at the Summit puts it this way – This Virtual Summit will cut through the fog of confusing financial jargon and build the confidence needed to seize control of your personal finances. Each speaker will pull back the curtain on their unique area of expertise. With their actionable advice and attention-grabbing speaking styles, these experienced Canadian gurus will help take your money game to the next level – no matter if it’s your first day at the financial dojo or if you’re already a 3rd-degree blackbelt in financial literacy.
You can acces your free pass or all access pass through this link.
In the Summit I will show Canadian retirees and near-retirees how they can create their own optimized retirement cash flow plan. Given that, I thought I’d create a post to demonstrate how we can develop professional-quality plans for a fraction of the cost.
The Globe & Mail offered another interesting real life retirement scenario this past weekend. I often input the numbers into the MayRetire retirement calculator to check up on the planner’s results and suggestions. I am curious as to how the retiremend spending plan shapes up.
The retirement scenario
Here’s some of the key details from the article.
Herman is 60 years old, single and recently retired.
“maximize spending and minimize taxes.”
He does not specify a retirement spending target. “I would like to know how much I can withdraw yearly to maximize income, minimize tax and reduce the clawback of Old Age Security at age 70.” He plans to defer government benefits until then. “I don’t plan to leave much in my estate,” Herman adds.
We asked Ian Calvert, head of wealth planning at HighView Investment Group in Oakville, Ont., to look at Herman’s situation.
What the expert says
Herman has accumulated a sizeable asset base but leaving a large estate is not a top priority, Mr. Calvert says.
Herman’s net worth is $3,036,000, which consists of his house, valued at $500,000 with no mortgage, $454,000 in non-registered stocks and some cash, $297,000 in his tax-free savings account and $1,785,000 combined in his RRSP and a registered retirement income fund, or RRIF.
His RRSP and RRIF represent 70 per cent of his investable assets, “so they certainly require some careful planning.”
“Herman has done an excellent job building up his RRSP, investing in a tax-deferred structure with meaningful tax deductions along the way,” the planner says. Now that he has retired and is in a lower tax bracket, he requires an exit strategy because all the withdrawals from his RRSP and RRIF accounts will be taxable income.
“Having assets divided between an RRSP and a RRIF gives Herman the flexibility to control the annual minimum withdrawals from the RRIF because he is still many years away from having to take mandatory minimums.”
Both accounts offer the same tax-deferred structure; however, the RRIF account has advantages for meeting recurring withdrawals, the planner says. “It’s the optimal account to use for the outflows to him personally.”
This strategy of keeping most of his assets in his RRSP and moving smaller amounts to the RRIF each year will work well until age 71, the planner says. At that time, all assets will be forced into the RRIF, and Herman will be required to take the annual minimum withdrawal the following year.
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For the first phase of Herman’s retirement plan, a RRIF withdrawal of $75,000 a year would be an optimal place to start, Mr. Calvert says. The full $75,000 will be taxable income.
On top of this, Herman will have to report all the interest, dividends and capital gains generated by his non-registered holdings. “With an estimated $17,000 of other investment income, his total taxable income is estimated to be $92,000 a year,” the planner says.
“This is a favourable target because keeping his income below $100,000 a year will keep his marginal tax rate at 28.2 per cent and his average tax rate at 15.5 per cent, combined B.C. and federal tax brackets. This also leaves a small buffer if he sells any positions and realizes capital gains year to year,” the planner says.
At this rate of withdrawal, if Herman can average an annualized rate of return of 5 per cent, the value of his RRIF should be maintained until age 72 when his full minimums start. At that time, the account would slowly start to deplete based on the larger minimum withdrawals.
The early withdrawals from his RRSP/RRIF throughout his 60s will provide income taxed at a favourable rate and prevent the accounts from creating a compounding tax problem for later years, the planner says.
His after-tax income on the $75,000 would be about $60,500 a year, which should satisfy his lifestyle expenses of $5,000 a month after tax. He should also continue to transfer $7,000 from his non-registered assets to his TFSA each year.
Given his strong financial position, Herman could increase his spending, Mr. Calvert says. He could comfortably spend about $20,000 a year more generated from the income in his non-registered portfolio. “Whether he spends this or not, this income will appear on his tax return each year.”
Because his RRIF can easily bridge the income gap between 65 and 70, and still maintain its value during this period, Herman is in a position to delay all government benefits without having an unsustainable withdrawal rate from his portfolio.
When his RRIF minimum withdrawals start in 2038, they will increase his total withdrawals to about $100,000 per year, based on his age and the estimated value at that date, Mr. Calvert says.
At age 72, when Herman is withdrawing his full RRIF minimum, plus his enhanced CPP and OAS benefits, he will have gross income of about $145,000 a year. This will increase his marginal tax rate to 38.29 per cent and will likely result in one-third of his OAS being clawed back.
Based on his current spending and the size of his portfolio, Herman’s net worth is expected to increase over the years. “If his goal is to leave only a small estate, he could consider spending more without concern, gifting to family members now, or reflecting on the purpose of his wealth and what legacy he wants to leave.”
Herman’s assets
Herman, 60.
Assets: Bank accounts $180,000; non-registered mutual funds $274,000; TFSA $297,000; RRSP $1,531,000; cash in RRIF $254,000; residence $500,000. Total: $3,036,000.
Getting started on MayRetire
Out of the gate it is very easy to enter the parameters on MayRetire, from government benefits to investment accounts and employer pensions (when present), inflation and retirement income levels. I did not include the cash amount. Perhaps that was earmarked for an upcoming purchase.
As per Ian Colvert’s suggestion the optimal plan certainly delays CPP and OAS payments until 70 to take advantage of the much greater payments. The RRSP / RRIF / LIF accounts, plus taxable accounts, will provide the income bridge. We’ll employ a modest RRSP meltdown strategy.
We start with a base $75,000 after tax income.
That’s already well beyond what the Herman was thinking of spending. But then we went a step further and added an additional $20,000 of annual spending (after tax) for Hermans’s go-go years. Most retirees embrace spending more in the early years while they have their health and energy. Spending might then dip in the slow-go years. It’s also wise to keep an eye on the late-in-life no-go years when healthcare costs, and personal care costs can spike.
It’s easy to add additional spending for a period or one-time events. We can do the same with additional income that might arrive.
We now have $95,000 of after tax income for the first 15 years of retirement. The income will then move back to the $75,000 base level. Here’s an overview of the plan.
Here’s how the income shapes up
The above chart shows the gross income, taxes, spending level and TFSA contribution. Yes we’re creating ‘additional’ taxes early in retirement to fund the TFSA. The spending down of the RRSP/RRIF amounts will also manage any potential OAS clawbacks. We’ll also smooth out the tax rate so that increased RRIF withdrawals don’t collide with those boosted CPP and OAS payments.
You’ll then see a chart on the income sources by year.
We see the RRSP/RRIF and taxable accounts doing the heavy lifting in the first 10 bridge years. The taxable (yellow) is depleted by age 73, the RRSP and LIF then move to a lower income generating range. We then see the CPP (orange) and OAS (blue) provide a nice base of income.
This chart adds more light on investment asset values over time.
You’ll also see that we intentially created a somewhat smoothed tax rate over time.
Must read: Six ways to lower your taxes in retirement.
MayRetire also offers this wonderful schematic that breaks down the inflows and outflows. The following shows the plan at age 72.
We can see that everything is ‘neatly’ presented and very easy to understand and digest. There is great comfort in seeing how your spending plan comes to life.
Here’s the Simple strategies that set you up for retirement success.
You will also be able to check in on the success rate of the plan using Monte Carlo simulations, and other stress tests.
At Retirement Club we’ll show you how to use MayRetire and create your own optimized cash flow plan. Of course there’s so much more to the club experience.
Be sure to check out the Retirement Club overview page.
You can sign up for MayRetire using this link. There is a free-use version and MayRetire Plus. You’ll save $20 and pay just $59 for for an annual subscription.
Thanks for reading and enjoy the Canadian Financial Summit. My session airs October 23rd.
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