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What the expert says

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“Jasmine and Terry are on track to retire in eight years, although with no margin of safety,” said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger.

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“To achieve their target income in retirement ($90,000 a year after tax), they would need $2.15 million. With their existing investments plus adding $50,000 a year to their RRSPs and $14,000 a year to their TFSAs, they should have $2.05 million when Terry is 61 and Jasmine is 55. This is four per cent short of their goal. To have a 10 per cent to 15 per cent margin of safety, Jasmine could work an additional three years.”

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Rempel agreed with the couple’s plan to apply for QPP and OAS at age 65. “Deferring QPP from age 60 to 65 gives them an implied return of 10.4 per cent a year. Deferring to age 70 gives them an implied return of 6.8 per cent per year, which will likely be less than their 100 per cent equity investments.”

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To assess the couple’s “three-year cash bucket” strategy, Rempel looked at holding various amounts of cash over a 30-year retirement during the past 150 years. His finding: Nobody has benefitted from any amount of cash over this time frame and for this amount of time. “My study showed that having between 70 per cent and 100 per cent equities and applying the four per cent rule (a guide for how much you can safely withdraw from your investments each year in retirement) provided a 97 per cent reliable cash flow for a 30-year retirement without managing withdrawals and 100 per cent managing the withdrawal rate.”

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Rather than a cash bucket, Rempel suggested the couple could use a credit line for any large, unexpected expenses or just sell some investments when necessary.

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He also recommended Jasmine continue to contribute at least $35,000 and Terry $10,000 to their RRSPs each year, or just enough to reduce their taxable income to $54,000 each year. This would put them in the lowest tax bracket in Quebec (26 per cent).

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“Contributing to their RRSPs will also increase the Canada Child Benefit by 5.7 per cent of the amount they contribute,” he said.

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One of the most effective ways to minimize tax in retirement is to ensure their taxable incomes are the same. “If Jasmine has a larger RRSP than Terry now, she should invest her RRSP contributions to a spousal RRSP in Terry’s name until their RRSPs are about the same size.”

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Rempel liked the couple’s plan to continue to maximize TFSA contributions throughout their lives, but suggested they consider dipping into their TFSAs any time they have larger expenses that would increase their taxable income above the lowest tax bracket.

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He also said an RDSP should be considered if the life expectancy of their child is at least 10 years. This will allow them to benefit from significant grants and bonds. “When the child passes away, they will lose the grants and bonds in the last 10 years, but all the contributions, grants and the growth in the RDSP would be part of the estate and could go to the family.”

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To protect their incomes, Rempel suggested they could get a $500,000 joint-first-to die 10-year term life insurance policy. “They can probably cancel any life insurance once they retire, since their investments would provide enough for the survivor to maintain their lifestyle.”

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*Names have been changed to protect privacy.

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Do you have a wealth building question for Family Finance? Email wealth@postmedia.com.

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