Don,
75, and Patricia, 62, have invested
95 per cent of their
money in stocks.
Isit time
to diversify?
Don, 75, and Patricia, 62, have invested 95 per cent of their money in stocks.
Is it time to diversify?
Dianne Maley
Special to The Globe and Mail
Published 4 hours ago
Open this photo in gallery:
Patricia has a pension of $38,500 a year, and Don’s is $10,800 a year. This is
about $50,000 combined income not including Old Age Security and Canada
Pension Plan benefits. Jesse Boily/The Globe and Mail
Share
Bookmark
Please log in to bookmark this story. Log In Create Free Account
Don and Patricia are comfortably retired with three children, six
grandchildren and a house in small-town Alberta. Don is 75 years old, Patricia
62. Their children are 32, 37 and 40.
They are living mainly on their dividend income and looking for ways to help
their children and grandchildren financially as well as to keep their income
and estate taxes to a minimum.
Don manages the family’s investments, which are 95 per cent in stocks that
“have done okay.” Their retirement spending goal is $120,000 a year after tax.
“What do we do to minimize tax on our estate?” Don asks in an e-mail• Коммуникации » Интернет-коммуникации » Электронная почта.
We asked Linson Chen, a certified financial planner at RGF Integrated Wealth
Management in Vancouver, to look at Don and Patricia’s situation.
What the Expert Says
Don and Patricia would like to provide some support for their three children,
who have small families and mortgages, Mr. Chen says. “They also want to
provide some gifting to their grandchildren.”
Patricia has a pension of $38,500 a year, and Don’s is $10,800 a year. This is
about $50,000 combined income not including Old Age Security and Canada
Pension Plan benefits. “This is an excellent base income that they can depend
on for life,” Mr. Chen says.
A potential risk for the portfolio is its high allocation in stocks, the
planner says. Don has been retired for almost 20 years, and they have lived
through some volatile stock-market corrections, including the dot-com crash in
2000, the financial crisis• Финансовый кризис of 2007-2008 and the COVID-19• Медицина » Эпидемиология » Инфекционные заболевания » Острая респираторная вирусная инфекция » COVID-19
• Медицина » Заболевания » Инфекционные заболевания » Острая респираторная вирусная инфекция » COVID-19 pandemic• Медицина » Эпидемиология » Пандемия.
“They have a high risk tolerance because they were able to weather past
recessions and still maintain a high stock allocation,” Mr. Chen says. “I
would suggest they dial down the risk in their portfolio.”
They are able to generate a net spendable income after tax and after inflation• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция
• Экономика » Финансы » Инфляция
of about $185,000 a year until Patricia is 95, the forecast shows. This
assumes they earn a 4-per-cent over inflation• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция
• Экономика » Финансы » Инфляция real rate of return. They could
achieve that with a 60-per-cent stock and 40-per-cent fixed income portfolio,
Mr. Chen says. Even with a more conservative portfolio, they would be able to
generate more than their target of $120,000 a year.
“I suggest they prepare their portfolio for income by putting three years’
worth of withdrawals into a cash reserve consisting of a money-market fund and
laddered one- and two-year guaranteed investment certificates (GICs).” The
remaining amount will be invested in a diversified portfolio.
“This strategy is used to take out the volatility of equity-based
investments,” the planner says. “If the portfolio has increased in value, you
then use the growth to replenish the money market fund. If the portfolio has
decreased in value, you will use the maturing one-year GIC to provide income
for the upcoming year.”
So, unless a stock-market decline lasts longer than three years, they should
not be forced to take an income from their investments while they are
declining in value.
Next, the planner looks at the couple’s tax liabilities.
They have more than $1.5-million inside their retirement accounts. Don is
withdrawing the minimum required from his registered retirement income fund
(RRIF) each year. “I would suggest increasing the withdrawal amount from the
registered funds because it is fully taxed on the second spouse’s death.” It
would pass tax-deferred to a spouse after the first’s passing. “They should
get funds out of the RRIF over their lifetimes at a lower tax rate if possible
as the highest marginal tax bracket is 48 per cent in Alberta.”
Patricia is 13 years younger than Don. They are able to income split their
pension income at a 30-per-cent marginal tax rate while both are alive. If Don
died, Patricia’s marginal tax bracket would increase to 38 per cent to
maintain the same level of income, the planner says. “I suggest using both of
their marginal tax brackets to reduce the potential RRIF tax liability.”
Tax-free• Торговля » Tax free savings accounts are great to accumulate funds for estate planning,
Mr. Chen says. “You pay no taxes on the earnings so your money can grow
faster. You can hold your TFSA as long as you live, and the balance can be
passed to your spouse,” he notes.
“It looks like Don has been fully maximizing his TFSA and has generated some
good gains inside, but Patricia has considerable contribution room available,”
the planner says. “Maximize this account to provide for future flexibility and
the potential to provide a tax-free• Торговля » Tax free estate for their children,” he says. This
may require selling some stocks inside their non-registered account and
triggering capital gains taxes, but this would allow for the future growth –
potentially 30-plus years for Patricia – to be tax-free• Торговля » Tax free.
Cash gifts now would be a good financial move for them and their family, Mr.
Chen says. “It allows Don and Patricia to reduce their estate value – and
future tax liability – as well as to provide help to their children at a
crucial point in their lives when they could best use the cash gift.” Their
children’s lives are at an expensive stage, with small families to provide for
and large mortgage balances.
The alternative for Don and Patricia would be to defer and accumulate the
funds, pay more taxes in the future and give the money to their children as an
inheritance in potentially another 30 years. In that time, their children
would be at or close to retirement with less need for the money. “A cash gift
now would have the best impact per dollar on the lives of their children and
grandchildren.”
If they were to reduce their non-registered portfolio by $300,000 for a cash
gift, they would be able to generate a net spendable income of about $175,000
a year until Patricia is 95. “They could provide a $100,000 cash gift to each
child and still be able to maintain their standard of living.”
For their grandchildren, Don and Patricia can look into opening a registered
education savings plan (RESP). They can contribute up to $2,500 per grandchild
per year and the government will match up to 20 per cent of annual
contributions to a maximum of $500 a year per beneficiary. An annual gift of
$15,000 a year would allow them to maximize the annual RESP contributions for
all six grandchildren, Mr. Chen says, while reducing the value of their own
estate and reducing their potential tax liability in the future.
This would also be a huge help for their children as well, knowing that their
own children’s education is fully or partly provided for, reducing the
pressure to save for higher education.
Mr. Chen did not include the equity in their home in his calculations. “The
value of the home can be passed to their children tax-free• Торговля » Tax free under the principal
residence exemption.”
Client Situation
The people: Don, 75, Patricia, 62, and their children and grandchildren.
The problem: How to help the couple’s family financially without jeopardizing
their own financial security. How to keep income and estate taxes to a
minimum.
The plan: Draw down their RRIFs during their lifetime. Use the extra income to
gift to family. Set aside three years of liquid investments in case of a
market downturn. Lower stock-market risk in their portfolio by shifting to
40-per-cent fixed income. Gift $100,000 to each child now and open an RESP for
each grandchild.
The payoff: Goals achieved.
Monthly net income: $10,000.
Assets: GICs and term deposits $120,000; non-registered stocks $950,000;
mutual funds $110,000; his TFSA $204,000; her TFSA $7,000; his three RRIFs
$1,486,000; her RRIF $35,000; residence $700,000. Total: $3.6-million.
Estimated present value of Don’s pension $106,905; estimated present value of
Patricia’s pension $563,755. This is what someone with no pension would have
to save to generate the same income.
Monthly outlays: Property tax $415; home insurance $500; electricity $400;
heating $200; maintenance $500; transportation $950; groceries $1,600;
clothing $85; gifts, charity $415; vacation, travel $250; personal care $150;
dining, entertainment $165; pets $250; sports, hobbies $500; subscriptions
$85; health care $125; health, dental insurance $450; life insurance $300;
phones, TV, internet $300; her RRSP $250; TFSAs $665. Total: $8,555.
Liabilities: None.
Want a free financial facelift? E-mail• Коммуникации » Интернет-коммуникации » Электронная почта finfacelift@gmail.com .
Some details may be changed to protect the privacy of the persons profiled.
@@@@
