Fred: $48,000 before taxes (from CPP, OAS, pension, part-time work, life income fund)
Wilma: $60,000 before taxes
Total monthly net: $9,000
Monthly (including money for holidays and home repairs): $6,875
Non-registered, balanced account: $127,000
Non-registered, balance account (different bank): $19,000
Non-registered, trust fund, GICs: $400,000
TFSA: $10,600 in high-interest savings
RRSP: $39,600 in Canadian equity
RRSP: $27,100 in Canadian equity (different financial institution)
RRSP: $156,700 in Canadian equity (different financial institution)
Wilma: RRSP: $335,000
By Joel Schlesinger
Originally published December 11, 2010 in The Winnipeg Free Press
Fred and Wilma had a financial plan drawn up recently, a manual on how to best use their retirement income.
While they wanted a financial road map, they ended up feeling even more lost than before.
"We looked at the plan and were more confused than anything," Wilma says.
The couple has almost $2 million in assets, with a home and cottage making up almost half their wealth.
They have $587,800 in RRSPs, $157,100 in non-registered investments and about $10,000 in a tax-free savings account. On top of that, Fred, 67, has a $400,000 trust fund he received when his parents passed away a few years ago -- what they both consider a 'sacred cow' to leave for their adult daughter.
But after painstakingly saving for retirement, the couple needs advice about how to crack open their nest egg.
"At this point, I'm really confused about when to pull out and what to pull out," says Wilma, 59, who's retiring in less than two years.
They had hoped the planner would sort out the mess, but he couldn't answer their questions clearly.
Fred and Wilma, who have no debts, still hold out hope they can get some answers -- if only to stop their agonizing over retirement planning.
"But we would like some understandable advice in layman's terms," Fred says.
Financial planner Doreen Sigurdson with Edmond Financial Group in Winnipeg says it's not surprising they're struggling to figure out how to manage their many retirement assets.
"They have spent their whole lives saving and paying down debt," says Sigurdson, a planner with CFP, RFP and CLU designations. "Now they have to shift gears and figure out how to enjoy the security they have built."
Their biggest problem is they have no organization to their investments. They need to simplify. While it makes sense to have many different investment vehicles -- RRSPs, a life income fund, a TFSA, non-registered investments and a trust -- holding them all at three financial institutions doesn't. The result is they'll likely get partial advice from three different advisers.
What they need is one adviser to provide them with a unified, understandable plan.
But advice aside, they do have enough assets to retire, she says.
With a conservative portfolio allocation, earning four per cent annually -- even with three per cent inflation -- they will have replaced about 80 per cent of their current after-tax income, far above the 60 to 70 per cent rule of thumb.
"This will provide them with $5,300 in after-tax, monthly income until Fred reaches age 90 -- his life expectancy -- and then it will drop to $3,500 until Wilma reaches 90," she says, adding these amounts are expressed in today's dollars.
Based on these projections, they can "take quite a conservative position" and leave the trust intact as a safety net, she says. The problem is their current RRSP portfolios consist of Canadian equity funds, reflecting a much more aggressive strategy -- likely unsuitable for their age and risk tolerance.
"They should ensure they have a substantial portion in fixed income investments for short- and medium-term income needs in retirement," she says.
Basically, they need to reallocate a portion of investments from equity to fixed income. And they likely need to do it soon because their RRSPs should be the first place to draw income from when required.
"They should withdraw steadily so the funds are brought into income gradually and taxed at the low, marginal tax bracket of 26 to 28 per cent rather than delaying withdrawals and being forced to take out larger percentages," she says.
If they wait, by age 72 they will be forced to make RRSP withdrawals, starting at 7.38 per cent of funds, which could increase their taxes.
Non-registered savings, in contrast, should be used to cover expense shortfalls and pay for major expenditures such as trips and home repairs.
They can also be used to increase short- and long-term tax savings. Because Fred owns all of the non-registered investments, he should contribute a portion of those funds to a spousal RRSP for Wilma, contribution room permitting.
In addition, he could contribute other non-registered funds to their TFSAs, which instead of being used as emergency funds should become part of the long-term savings and income strategy.
"Anyone who has savings outside of an RRSP should look at making use of a TFSA for the benefit of tax-free accumulation."
Furthermore, the CRA allows one spouse to contribute to the other's TFSA, allowing Fred to build up Wilma's savings outside RRSPs, providing more income flexibility.
Then there's the elephant in the room -- the trust fund. While the couple considers it a 'sacred cow,' Sigurdson says the fund could provide them with additional income for travel and other big-ticket items.
Assuming it's an Inter Vivos trust -- set up while the contributor was living -- it was likely created to avoid probate.
This also means income earned within the trust is taxed at the highest marginal rate -- 46.4 per cent.
At the moment, they have smartly set up the trust to pay out income to their daughter, currently attending school, so it's taxed in her hands at a lower rate.
While they would like to leave it intact as an asset for their daughter to inherit, they do have other options.
A possibly more efficient way to leave an inheritance is a 'joint and last to die' life insurance policy, which would provide her with money tax-free and avoid probate fees.
"It could serve to replace the trust fund and they could then feel free to spend their savings during their lifetime knowing an inheritance is in place."
A $400,000 policy -- assuming they are relatively healthy -- would cost about $5,000 per year.
While costly up front, it would provide better long-term returns than the trust fund -- a 6.2 per cent after-tax return on the invested premiums if paid out in 30 years.
It's just one of many options they have available, Sigurdson says. And while choosing an option may seem intimidating, it's really a good position for them to be in at this point.
All they really need to do is shop around for a good adviser who can help them organize and streamline their retirement into a workable -- and above all -- understandable plan.
"If they can get to a point where they can see all their wealth on one statement and be able to track their progress, they will have some peace of mind about retirement."
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of the writer's knowledge as of December 5, 2009. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.