More of your clients are near retirement, so they’re busy building wealth and paying off debts. Both are important, but this year’s IAFP case study showed advisors also have to tackle estate planning before clients stop working.

Case study

In last month’s AER, we examined an IAFP case study, which features a hypothetical Ottawa family. The article discussed how Jim, 42, Sarah, 40, and their three children might be affected if they move to Texas (Sarah’s been offered a work transfer).

The couple invests conservatively. Their two RRSPs, two TFSAs, RESP and open joint accounts are in mutual funds. Sarah also has $600,000 worth of employee stock options.

In this piece, we look at how Sarah and Jim should prepare for retirement and transfer wealth to their kids.

Jim’s retirement income

The couple can retire comfortably if they continue saving, says David Ablett, director of tax and retirement planning at Investors Group in Winnipeg. He tackled this topic at the IAFP symposium in October.

If Jim remains with the Canadian government, Ablett calculates he could retire at age 55 with a pre-tax, indexed pension of $84,361 per year until age 65. After that, he’d receive $70,176 per year. Jim has “a very generous plan that’s based on final average earnings,”
adds Ablett.

What’s more, Jim’s contributions are currently tax deductible. And once he retires, “up to 50% of [his] pension income can be allocated to Sarah for tax purposes,” as long as she doesn’t acquire an IPP.

If Jim dies, Ablett says Sarah would continue to receive “a pension equal to 50% of the benefit earned, plus benefits for dependent children.” But if Jim’s laid off or chooses to go to the U.S., he’d have three options: an annual allowance starting at age 50; a deferred annuity of $39,060 starting at age 60; or the commuted value of his pension ($325,000), which would go into a locked-in RRSP.

If he retires in the U.S., he’d face withholding tax of between 15% (for periodic payments) and 25% (for lump sum payments) on any RRSP income, as well as tax on any worldwide income. He could, however, get credits for any Canadian taxes paid.

Jim also has his severance payout to consider, says Ablett, which would be worth $38,367, or 21 weeks’ worth of his current pay.

He’s getting this payout because a federal program used to allow government workers to accumulate a week’s worth of benefits for each year of work. It stopped in
2011, but workers kept their accumulated balances.

Jim could either take the funds now or wait until he retires, when his payout would take into account his weekly (higher) pay rate at
that time.

A payout at retirement is preferable, says Ablett, since it would be considered “a retiring allowance. Rollover provisions would apply; Jim could transfer $8,000 of severance to his RRSP” under those rules if he has room.

According to the case study, Jim also has group life insurance worth twice his annual salary. The policy’s payout falls 10% every year starting at age 65. By age 75, he’d have a $10,000 paid-up life policy. If he moves to Texas, he’d have to find out how the IRS might treat it.

Sarah’s retirement income

Sarah could retire at 60 when her government benefits kick in, says Ablett.

She has no pension, but owns a $300,000 life insurance policy with a cash value of $5,500. Her annual premiums are $3,500. She also has a short-term disability policy that offers 66% of her present salary ($120,000) for two years and a long-term disability policy that offers 40% of her salary, or $80,000, until age 65.

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