Eleanor, 60, and Rowan, 59, are both retired. Can they afford to up their spending and still have enough saved for assisted living?
Eleanor retired three years ago with a government pension. Her husband, Rowan, quit working a couple of years earlier with no pension plan. Eleanor is age 60, Rowan 59. They have some savings, a mortgage-free home and a rental property that generates positive cash flow of about $30,000 a year.
Eleanor’s defined benefit pension pays $77,330 a year, indexed to inflation, including a bridge benefit of $13,840 that will end when she turns 65. The couple have a 16-year-old son and an adult daughter with children of her own.
“We own our own condo in Toronto and we are approved for a home equity line of credit for $485,000, to buy a cottage,” Eleanor writes. “We’re still looking for the right one.”
“Our main question is about the most efficient way to draw down our savings and enjoy travel with our family – and hopefully, a family cottage – while we are still healthy and able to do so,” she writes.
“Based on family history, we expect one or both of us will be less mobile starting at age 80 or 85,” she adds. They wonder how much of their savings they can draw down while still preserving enough for assisted living later in life. Among their long-term goals is lending funds or gifting property to their children.
Their retirement spending goal is $118,000 a year after tax.
We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management, to look at Eleanor and Rowan’s situation.
What The Expert Says
Rowan and Eleanor decided to retire early so they can travel and enjoy life while they are both in good health, Mr. MacKenzie says.
Their stated goals include buying a new vehicle, enjoying more travel and buying a cottage after their rental property has been sold in about three years’ time. “To do all this, they want to increase their spending from the current $88,000 a year to $118,000, plus income tax.” Based on reasonable assumptions, they should be able to achieve their goals, Mr. MacKenzie says.
But they may not leave much of an estate. “By spending at this level, they’ll have used up all of their investments and all of the proceeds from the eventual sale of their home, their rental triplex and the future cottage by the time they’re in their mid to late 90s, so there will be little, if anything, left for their heirs.”
This would be at odds with their goal of giving something to their children, he notes. In a questionnaire the planner asked them to fill out, Eleanor and Rowan ticked off “leaving as much as possible to children and family” as a key goal. The goals conflict needs to be resolved, the planner says. “It would make sense to discuss this issue with their children.”
Eleanor and Rowan are also concerned about health care in their old age. “They want to assume a cost of $5,000 each per month in dollars with today’s purchasing power,” the planner says. “At age 80, if they require this level of spending, they will have enough savings to pay for a high-quality retirement home for about 10 years.” They would still have Eleanor’s pension income as well as their government benefits.
“This might be an acceptable risk to take because the reality is that if they start to have mobility issues and require assisted living in their early 80s, they are unlikely to live much beyond age 90.”
Next, the planner looks at possible tax-saving strategies.
Because of her pension, Eleanor is in a much higher tax bracket than Rowan, so to minimize income tax, they should aim to equalize taxable incomes as much as possible, Mr. MacKenzie says.
Eleanor plans to defer collecting her Canada Pension Plan benefits until age 70. This means that when she converts her RRSP to a registered retirement income fund and begins mandatory withdrawals (in the year she turns 72), her income would be about $120,000 a year. With this level of income, most of her Old Age Security would be clawed back.
They are planning for Eleanor to draw on her RRSP to make up the shortfall in their cash flow until she begins collecting CPP at age 70. “It would be better for Eleanor to start her CPP at age 65 and for tax purposes split it with Rowan,” Mr. MacKenzie says. When she begins withdrawing from her RRIF, she should also split the RRIF income with Rowan. Eleanor’s pension has a 70-per-cent survivor’s benefit.
At some point in the future, after they sell their triplex and they have non-registered funds generating taxable income – Eleanor should use her pension and her share of the investment funds to pay all the expenses so that Rowan can save all his CPP, OAS and his share of the investment income, the planner says. “By so doing so, Eleanor will reduce her investment income and Rowan will eventually build up an investment account. That way, they’ll pay less income tax than if all the investment income was split equally and half was taxed in Eleanor’s hands at her higher marginal tax rate.
If and when the couple sell a property, they should use some of their proceeds to up their tax-free savings accounts. If they buy a cottage and increase their spending as planned, in 2028, when they are both collecting OAS and with higher costs owing to inflation, they’ll need about $160,000 a year to cover spending and income tax.
To make ends meet, they will then need to supplement their cash flow by using up some of their capital, Mr. MacKenzie says.
His projections show that Eleanor will have about $100,000 a year, broken down as follows: pension $75,000 (reduced because the bridge benefit ceases), OAS $9,000 and CPP $16,000. Rowan will have about $21,000 (OAS $9,000 and CPP $12,000). They will need to draw about $40,000 from their registered accounts, which will be split for tax purposes (about $25,000 from Rowan’s RRIF because he is in the lower tax bracket, and about $15,000 from Eleanor’s).
At this level of spending, by the time Eleanor is 80, they will have exhausted all of their TFSA and RRSP savings. To maintain their lifestyle, or to pay for the cost of a retirement home, they will then have to sell one of their remaining properties, or take out a reverse mortgage to supplement their income, the planner says.
Rowan and Eleanor do not consider themselves knowledgeable about investing, the planner says. “They recently looked for an investment manager who works under the fiduciary standard of care, but they found that their account did not meet the minimum size requirements,” Mr. MacKenzie says. If they sell their investment property in a few years, they expect to have an additional $400,000 to invest. “At that time they should consider moving their investments to a firm that is governed by the fiduciary standard of care,” he says. “They should also know that robo-adviser firms operate as fiduciaries.”
The people: Eleanor, 60, Rowan, 59, and their two children.
The problem: Can they afford to up their spending, buy a cottage and still have enough for assisted living in their old age?
The plan: Eleanor takes CPP at age 65 and, for tax purposes, she splits her CPP and her pension income and pays the bills so Rowan can add to his savings and more of their investment income will be taxed at his lower rate. They decide what is more important: leaving a large estate or enjoying a comfortable retirement.
The payoff: A clearer picture of what they can comfortably achieve and what might involve trade-offs.
Monthly net income: $7,585.
Assets: Cash $4,000; her TFSA $95,080; his TFSA $95,608; her RRSP $107,225; his RRSP $143,490; LIRA $93,590; registered education savings plan $65,000; principal residence $750,000; rental property $800,000. Total: $2.15-million.
Monthly outlays: Condo fees $1,370; property tax $262; water, sewer, garbage $145; home insurance $165; electricity, heating $155; maintenance $55; transportation $390; groceries $600; clothing $50; line of credit $400; car loan $220; gifts, charity $320; vacation, travel $800; dining, drinks, entertainment $725; personal care $50; golf $50; sports, hobbies $375; subscriptions $70; health care $150; communications $270; reserve for big ticket items $610. Total: $7,230.
Liabilities: Home equity line of credit $19,625; car loan $14,056. Total: $33,681.