Will Morris and Abigail achieve their retirement goals and leave their TFSA to their children?

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Their plan is for Abigail to receive her pension and Morris to withdraw from his RRSP to make ends meet.Fred Lamb/Globe and Mail

Morris and Abigail, who are in their mid-50s, are growing tired of their jobs and want to take early retirement in 2025. They will leave with a combined annual salary of $335,000 plus Morris’ bonus. Morris is 54 years old and works in sales, and Abigail is 56 years old and works in health care. They have two children, she is 17 and she is 19, and have a mortgage-free home in the Greater Toronto Area.

Children play an important role in planning.

Abigail will receive a defined benefit pension of $52,885 per year from 2025, plus a bridge benefit of $15,150 per year that ends when she turns 65. Morris has a small DB pension that pays him $7,700 a year at age 65. Morris also has a defined contribution pension at work. He contributes his 5 percent of his salary and the company matches it.

Their plan is for Abigail to collect her pension and Morris to withdraw from her RRSP to make ends meet, Morris wrote. They also receive dividends from non-registered accounts. They plan to continue contributing to tax-free savings accounts (TFSAs).

“We invest primarily in blue-chip dividend stocks, as well as some exchange-traded funds with U.S. and international exposure, guaranteed investment securities, and fixed-income ETFs,” Morris added.

“Can you sustain your annual after-tax expenses of $110,000 until age 95?” asks Morris. “Should I convert one or both of my RRSPs to a Registered Retirement Income Fund (RRIF) in retirement? When we die, we can pass the money from our TFSA, non-registered accounts, and home to our children, right? Do you want it?”

We asked Caitlin Douglas, a Certified Financial Planner (CFP) at Manulife Securities in Winnipeg, about Morris and Abigail’s situation. Ms. Douglas also holds the Chartered Financial Analyst (CFA) designation.

What the experts say

“Initially, I had some trepidation when I learned that my client wanted to keep the TFSA intact as a real estate asset,” Douglas says. “But as we were building our retirement plan, it quickly became clear that this was more than just a retirement plan, it was actually, and more importantly, an estate plan.”

Because the client has a defined benefit pension plan and unregistered assets and has saved a significant amount during his working life, he can run a retirement scenario that leaves the TFSA untouched until the end, under the following assumptions: “The planner said. He said inflation averaged 3 percent, investment returns were 5 percent, and that Morris and Abigail died in 2064, Morris at age 95 and Abigail at 97.

Planners assume a mixed liquidation strategy of unregistered withdrawals and RRIF withdrawals, assuming that a registered retirement savings plan (RRSP) is converted to a RRIF upon retirement.

Douglas said clients can leave their TFSA intact and name their two children as temporary beneficiaries. By naming beneficiaries, your assets pass directly to your children, avoiding probate and legal costs. “Similarly, a TFSA has no, or at least limited, tax implications on death, so there are no withholding issues from paying money directly to beneficiaries,” she added. This means you don’t have to give back some of your TFSA earnings to cover your parents’ inheritance tax bill, which can happen with an RRSP or RRIF.

Starting with the assumptions above and assuming a retirement spending goal of $110,160 per year after taxes, adjusted for inflation, planners first consider how government benefits will affect estate planning. In short, deferring government benefits leaves you with a larger fortune.

If Morris and Abigail defer Canada Pension Plan (CPP) and Old Age Security (OAS) benefits up to age 70, “As a result, the goal is 100% met and you will have $5.5 million left in your estate upon successful completion,” Douglas says. The bulk of that will come from $2 million from Morris’ TFSA, $1.6 million from Abigail’s TFSA, and the estimated value of their home starting at $1.4 million. The rest will be his remaining RRIF assets and unregistered assets.

Deferring CPP until age 70 increases customers by 42% and OAS by 36%. “In doing so, our clients may be able to deregister their registered assets faster, potentially reducing the tax impact on the property, and resulting in greater returns than we can comfortably assume our clients will be able to earn.” rates will be guaranteed,” says the planner. By deferring government benefits, the client’s estate would be about $380,000 more than if she had received it at age 65.

“This retirement plan tends to work no matter how you look at it, but the real deciding factor is the ultimate estate plan,” Douglas says.

Next, we look at events that can damage real estate value. “Retirement planning doesn’t necessarily take into account the idea that one spouse will die sooner than expected,” says the planner. Because Abigail is in a higher defined benefit pension plan where she is paid a 60 percent survivor benefit, Douglas is unsure what will happen if Abigail dies prematurely at her age of 75. We are considering.

In this case, the value of their property falls to $2.4 million, less than half of the optimal situation of $5.5 million. The unregistered assets and RRIF assets will be depleted, leaving the mansion with $1.4 million and Morris’ TFSA with $1 million.

“Whether you’re widowed or widowed, divorced or single, we often see that single people have a negative impact on their taxes,” Douglas says. As her widow, Ms. Morris will lose the ability to pension-divide her defined benefit pension, her other spouse’s OAS, and most of her CPP, she says. Mr Morris will also lose 40% of Abigail’s defined benefit pension. To meet the income requirement, you must withdraw more income from your investment.

“Mr. Morris may end up spending less than he did with them, but just because he loses his spouse in retirement doesn’t automatically mean he spends half as much.” says the planner. Many expenses, such as property taxes, home insurance, and rent, remain the same whether you are living alone or with two people. Morris’ retirement plan would still work, but he would likely get some or all of his OAS benefits back.

“We’re seeing an even bigger impact on real estate assets,” Douglas says. “If Abigail were to die too soon, Morris would be left with nearly $3.2 million less for his children if he lived to age 95.”

The situation would improve if Abigail received a joint survivor benefit of 75%, the maximum allowed by the pension plan, even though her benefit would be reduced by 3%. The estate will be left with $2.5 million, about $152,000 more than the 60% survivor benefit.

“What started out as a regular run-of-the-mill retirement plan evolved into a much more interesting estate planning case,” Douglas says.

Client situation

people: Morris (age 54), Abigail (age 56) and their two children.

problem: Will they be able to meet their retirement spending goals while leaving much of their assets to their children, especially their TFSA and home?

plan: Retire as planned and defer government benefits until age 70. Abigail may want to consider choosing a 75 percent pension survivor benefit instead of 60 percent.

In return: Perhaps they want that legacy to be passed on to their children and eventually their grandchildren.

Monthly net profit: $17,000.

assets: Cash and equivalents were $96,000. Joint unregistered investment $155,000. Morris’ unregistered portfolio consists of $430,000 in securities and $68,000 in cash. His TFSA is $155,000. Her TFSA is $100,000. His RRSP is $850,000. Her RRSP is $280,000. The market value of his defined contribution plan is $57,000. $150,000 in registered education savings plans. Housing costs $600,000 (underestimated at Morris’s request). Total: $2.94 million.

The estimated present value of Morris’ DB plan is $150,000. The estimated present value of Abigail’s DB plan is $1.1 million.

Monthly expenses: Property taxes $580. Water, sewer and trash $100. Home insurance $110. Electricity is $100. Heating is $225. Maintenance, garden $630. Transportation fee: $925. Groceries cost $1,300. Clothes cost $100. Vacation, Travel $1,250. New car fund $780. Food, drinks and entertainment $700. Personal Care $100. Club membership is $90. Pets are $250. Sports, Hobbies $210; Subscription fee $80. Health and dental insurance $240. Life insurance for $60. Phone, TV, and Internet $265. TFSA he contributed $1,085. Total: $9,180.

liabilities: none.

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