Advisor analysis – Warren MacKenzie

Karen and Sam have two major objectives: to maintain their current standard of living in retirement and to care for their disabled daughter. They’ve done well to accumulate a net worth of about $1.65 million, after capital gains tax. But the numbers don’t add up for them to maintain their lifestyle if they retire now and never work again.

Investing about $1.65 million and earning 5% per annum after management fees will give them $82,000 per year, but they’re spending more than that and need to cover income tax as well. To maintain their lifestyle, they will immediately be dipping into capital. As they deplete capital, they will earn less and will need to dip into capital at a faster rate. A financial plan based on a number of assumptions shows that by age 80 they will have nothing left except their home.

So what can they do? They can find other employment after they sell their business and work until age 65; they can reduce their spending significantly; or they can take more risk with their investment portfolio with the hope that they will average 6% instead of 5%.

The best solution is for Karen and Sam to find other employment. Because they have practical experience running a business, it should be fairly easy for them to find work. That work will provide extra income, increase the amount they will earn from the Canada Pension Plan and give them something to do with their time.

They should also explore tax saving and estate planning opportunities such as the Registered Disability Savings Plan (RDSP) and Henson Trust. They can expect their RRIF payments, if taken at age 72, will put them into the zone of Old Age Security clawbacks. So, if they have no income between the time they retire and age 72, they should turn their RRSP into an RRIF and withdraw at least an amount sufficient to increase their income to $40,000 per year to take advantage of low rates of income tax on the first $40,000 of income and protect their OAS.

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