When re-evaluating your retirement plans, consider some life choices you can make to preserve your capital. It is up to you to decide what you want and don’t want to do, writes Allan Norman. (Credit: Unsplash/Postmedia files)
Q. I have recently been made redundant at age 59 and my wife and I need to preserve the capital in my registered retirement savings plan (RRSP) and tax-free savings account (TFSA) while at the same time trying to generate income of about $35,000 net per year for the three to five years until my Canada Pension Plan (CPP), Old Age Security (OAS) and employer pension payments ($16,000 annually) kick in. My wife Lisa is 62 and at age 65 she will be entitled to half CPP plus OAS. We do not own our own home but rent our two-bedroom apartment for $1,800 a month and we’re happy here.
Right now, we currently have about $300,000 total in two RRSPs split equally between us ($150,000 each) and $100,000 total in TFSAs, again, split evenly ($50,000 each) and invested in a balanced fund invested 60/40 in equity to fixed income investments. This is the asset mix for both our TFSAs and RRSPs. Can you advise the best way forward to preserve most of our capital until the other income streams kick in at age 65? —Regards, Louie in Winnipeg
FP Answers: Louie, what is your real concern? I suspect it is supporting your lifestyle now and into the future. If that’s the concern, and it means using your capital sooner, does it matter?
You can minimize capital encroachment through a combination of life choices intertwined with financial and tax planning strategies. Life choices have the biggest impact on your financial future and financial and tax strategies have a smaller impact.
Consider some life choices you can make to preserve your capital, such as finding employment, reducing spending, keeping vehicles longer — all things in your control and that you can do on your own. It is up to you to decide what you want and don’t want to do.
On the financial side, I understand wanting to preserve capital but it is a limiting thought so it’s best you put it aside. Instead, explore all possibilities. You are heading down the right path by identifying all the assets and income streams you have and will have in the future. Now think about how you maximize everything to your benefit.
Ideally you are working with a planner using computer simulation programs such as modelling life choices intertwined with financial and tax strategies. This is not a back-of-the-napkin calculation because there is a lot going on and a lot of moving pieces. How much and when you plan to spend money affects strategies. Plus, assets are growing and declining at different rates, providing different income streams and having different tax rates so those all have to be considered.
I can’t put you in the simulator here and I don’t know your life choices so I will skip ahead and give you two financial tactics to think about: delaying CPP and OAS to age 70 and revisiting your 60/40 equity to fixed income investment portfolio.
It is great that you are waiting to age 65 to start your CPP but what about delaying CPP and OAS to age 70? Your CPP will likely increase at a minimum of 8.4 per cent a year, which is huge, while OAS will increase at 7.2 per cent a year. Both are guaranteed indexed incomes for life, provide added income security and deposit money directly to your bank account, which is much easier to spend as opposed to having to sell investments for your spending money.
How can you afford to delay CPP and OAS? By matching your registered retirement income fund (RRIF) withdrawals to what your annual CPP and OAS pensions would have been between age 65 and 70. Yes, that may mean depleting your RRIF sooner than you would like. As a matter of fact, when I model this, you won’t have enough money to get you to age 70 unless you start your OAS at age 65. This is why you want to put your situation in a simulator and have a serious play session trying what ifs, so you can answer questions such as: How much income do I need to earn? For how long do I need to earn it if I want to delay OAS? What can I afford if I don’t work? Find the solution that works for you.
What is your rationale for a 60 per cent equity and 40 per cent fixed income accumulation portfolio? Did you complete a risk tolerance questionnaire and settle on an allocation? It’s good news if you did. It is possible that with a little more investment knowledge you might accept a portfolio with higher equity exposure to increase expected returns, which will help to maintain capital.
This is my suggestion, Louie. Ask your advisor to run the 20-year history (the longer the better) of a 70/30 or a 90/10 equity to fixed income portfolio for you, one with no withdrawals and one with withdrawals. Over the historical time periods illustrated note the volatility and performance differences of the portfolios. You will see significant differences that will help you understand the impact fixed income investments have on volatility and on long-term returns. With this extra little bit of investment education, you may or may not change your 60/40 allocation.
Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.
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