When they have both fully retired, Olivia and Elijah plan to move from British Columbia to Saskatchewan to be closer to family.Tijana Martin/The Globe and Mail
Olivia describes herself as an incorporated small business owner contemplating retirement within the next five to 10 years. “I find it difficult to pinpoint when I can afford to retire and I would really appreciate your analysis of my financial picture,” she writes in an e-mail.
She draws a salary of $150,000 a year from her service business. Her husband, Elijah, is 65 and earns $50,400 a year.
The 55-year-old has a personal pension plan held within her corporation that will pay $1,996 a month, with 1-per-cent indexing, at age 60.
When they have both fully retired, Olivia and Elijah plan to move from British Columbia to Saskatchewan to be closer to family. They hope to travel extensively in the winter. In the meantime, they want to invest and save as much as possible, catching up with their unused tax-free savings account contribution room.
Their retirement spending goal is $120,000 a year.
We asked Trevor Fennessy, a portfolio manager at CWB Wealth Partners in Calgary, to look at Elijah and Olivia’s situation. Mr. Fennessy holds the chartered financial analyst and certified financial planner designations.
What the Expert Says
Leading up to retirement, Olivia is encouraged to defer as much of her income as possible by continuing to max out contributions to her pension plan, Mr. Fennessy says.
She will have the option to make a lump-sum contribution to the pension plan to purchase enhancements such as added indexing, or enhanced survivor benefits for her spouse. “This contribution will be deductible from her corporate income and could be largely beneficial for her in the year of retirement,” the planner says.
For personal savings, Olivia and Elijah should direct their savings to topping up their TFSAs. “Although Elijah has substantial RRSP contribution room, accumulating funds in a TFSA or non-registered account will provide more flexibility for the couple to cover off lump-sum expenses – such as a property deposit, renovations, or moving expenses – that will arise with their planned move to Saskatchewan.”
They will not pay tax on the sale of their B.C. home. However, a move to Saskatchewan “will bring a whole new set of tax brackets for the couple,” Mr. Fennessy says. Based on the couple’s income sources, they can expect to pay higher income tax in Saskatchewan. “This creates a significant gap in their overall net worth compared against staying in British Columbia,” the planner says. “However, the combination of lower probate fees and Saskatchewan having the lowest top marginal tax rate will help to close this gap and make the tax differences from the move minimal from the perspective of their net estate value.”
Upon their move, Olivia and Elijah are encouraged to update all their estate planning documents to ensure they comply with the laws of their new province. Naming an executor based in Saskatchewan will also be crucial to ensure that their estate is dealt with in a timely manner. Olivia and Elijah should also consult with a tax and legal professional to determine the implications of a provincial move on Olivia’s corporation and pension plan.
Because they plan to travel extensively, they must ensure that the cost of travel insurance fits well within their budget, the planner says. This cost will become substantial as the couple grow older.
Elijah is planning to delay Canada Pension Plan benefits to age 70 but has begun taking his Old Age Security benefits already. Olivia will benefit from deferring both CPP and OAS to age 70. “The couple has sufficient assets to draw on during the deferral period (between age 65 and 70) and deferring benefits will allow them to deplete some of the corporate assets while they are in a lower tax bracket,” Mr. Fennessy says.
Given the couple’s savings to date and projected accumulation of assets over the next five years, Olivia and Elijah are on pace to enjoy a comfortable retirement at age 60 and 70 respectively, the planner says. This is assuming a 4-per-cent rate of return on their portfolio, one per cent growth on real estate, 2.1 per cent inflation, and a life expectancy of age 95.
Target spending of $10,000 a month would leave Olivia and Elijah with a net estate of $5.1-million at age 95, the planner says. Their net worth will continue to grow for many years, declining only after Elijah’s death mainly because of a higher tax burden for Olivia.
Based on the couple’s spending goal, they will deplete about 20 per cent of the purchasing power of their overall net worth while maintaining a sufficient buffer of investable assets to support them out to age 95, the planner says.
If they wanted to fully deplete all their investable assets, Olivia and Elijah could increase their retirement spending by up to 25 per cent. This would still leave the couple’s home intact to provide a buffer for health-related expenses that could arise later in life, Mr. Fennessy says. “At their desired spending rate, Olivia and Elijah’s investable assets could easily support an extended lifespan of more than 10 years beyond age 95.”
In terms of withdrawal order, the couple should focus on drawing from Olivia’s corporate investments first, he says. Withdrawals from the corporation will consist of tax-free payments from the capital dividend account and taxable payments through eligible and non-eligible dividends.
Eligible dividends receive more favourable tax treatment at the personal level to account for having paid higher tax at the corporate level. They receive a larger dividend tax credit than non-eligible dividends.
Based on the newly proposed capital gains legislation, when Olivia sells assets at a capital gain in retirement within her corporation, two-thirds of the capital gain will be taxable as income at the corporate level. The remaining one-third can be distributed personally tax-free via the capital dividend account.
The proposed increase in the capital gains inclusion rate will have a substantial impact for Olivia and Elijah, reducing the net value of their estate by more than $250,000, the planner says.
Olivia and Elijah will benefit from income splitting throughout retirement. This will allow them to share the income from Olivia’s pension immediately upon retirement and split any registered withdrawals after the age of 65.
Client Situation
The People: Elijah, 65, and Olivia, 55.
The Problem: When can they afford to retire and spend $10,000 a month? In what order should they draw on their savings?
The Plan: Olivia taps her corporate savings first, deferring government benefits to age 70. They split income to save taxes.
The Payoff: The comfort of knowing they have more than enough money.
Monthly net income: $12,990.
Assets: Joint bank account $33,000; her TFSA $90,100; his TFSA $5,700; his RRSP $165,000; corporate investment account $1,326,315; other corporate (cash operating account $200,000; cash surrender value of life insurance $86,000; precious metals $183,000); residence $850,000. Total: $2,939,115.
Commuted value of Olivia’s personal pension: $374,000.
Monthly outlays: Condo fee $125; property tax $280; water, sewer, garbage $100; property insurance $150; electricity $85; heat $120; maintenance, security, garden $130; car insurance $275; fuel $300; oil, maintenance $200; groceries $1,000; clothing $300; gifts, charity $485; vacation, travel $3,750; personal care $470; dining out $500; sports, hobbies $50; subscriptions $90; health care $150; life insurance $565; phones, TV, internet $390; TFSAs $2,000. Total: $11,515. Unallocated surplus of $1,475 goes to catching up with TFSA contribution room.
Liabilities: None.
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Some details may be changed to protect the privacy of the persons profiled.
