Joan is 60 years old. She is wondering if she can generate an after-tax income of $80,000 per year in retirement.

Can Joan help her daughter?

Joan is 60 years old. She is wondering if she can generate an after-tax income of $80,000 per year in retirement.

She has $1,100,000 in RRSPs, $115,000 in her Tax-Free Savings Account (TFSA) and $300,000 in her non-registered open account.

Joan has a daughter who is 30 years old and is wondering if she can give her $300,000 to help her buy her first home.

She has a principal residence worth $3.1 million. She has no mortgage.

Income Results

If Joan retires at the end of this year, she could generate a net spendable income (after-tax and after inflation) of approximately $75,000 per year. If she retires at the end of next year, she could generate a net spendable income of approximately $80,000 per year. If she retired in four years’ time, she could generate a net spendable income of approximately $88,000 per year.

If instead she gave her daughter $300,000, she could generate a net spendable income (after-tax and after inflation) of approximately $62,000 per year if she retires at the end of this year, $65,000 per year if she retires at the end of next year, and in four years’ time, she could generate $72,000 per year in net spendable income.

If she wanted to generate a net spendable income (after-tax and after inflation) of $80,000 per year, she would need to use some of the equity from her principal residence when she is approximately 81 years old if she retired this year, approximately 85 years old if she retired in two years’ time, and approximately 90 years old if she retired in four years’ time.

Results

It appears that Joan should be able to help her daughter and retire in three or four years, and maintain her desired income in retirement.

Recommendations

1) Joan should start preparing to generate an income in retirement.

One of the greatest risks involved in retirement income planning is the risk of the stock market correcting (dropping) right before or right after you retire. 

Your portfolio should be aligned with your retirement objectives at least five years before your retirement date. Thus, five years before retirement you should have at least two to three years’ worth of your desired retirement income in a fixed-income vehicle (GIC or bond) that will mature the day you retire.

If the stock market is performing poorly five years before retirement, then you will have at least five years to let the stock market grow before having to take money from your portfolio to generate income.

2) Start OAS at age 65.

3) Defer CPP until age 70. 

4) Apply for a line of credit against her house in the amount of $750,000. 

A line of credit is just a form of long-term care insurance. The line of credit would allow Joan to use the equity of her principal residence if she needed any long-term care assistance later in life. In addition, it may make sense for Joan to defer her property tax. However, the order this is done is very important. If you defer your property taxes, you cannot qualify for a line of credit but if you have a line of credit, you can still defer your property taxes. It is easier to apply for a line of credit while still working.

5) Ensure that her daughter is the beneficiary on her RRSP and TFSA.

6) Have the appropriate estate planning documents completed. This would include an updated will, power of attorney (POA) (for financial decisions) and a representative agreement (for healthcare decisions).

Retirement Income Strategy

We would recommend the following strategy: 

1. Invest one year’s income in a high-yield savings account that will be used for the first year’s income. 
2. Invest one year’s income in a 1-year bond or GIC.
3. Invest one year’s income in a 2-year bond or GIC.

It is important that you own the fixed income (bond or GIC) directly as you do not want the current market to influence them, and you will know how much they will be worth at a future date. A bond fund or mortgage fund is not suitable for this purpose because both can fluctuate with changes in interest rates – as interest rates rise, bond and mortgage fund market values decline.

1. Invest the balance of your investments in a growth portfolio based on the results of your personal Investment Policy Statement (IPS)

How does this strategy work?

The rationale behind this strategy is that the money market account will deplete itself over the first year. After the first year, if the growth part of the account has grown in value, then you take the following year’s income from the growth portion (i.e., you use some of the growth portion of the account to replenish the money market fund). If, however, the stock market performs poorly and the growth part of the account decreases in value, then you use the maturing GIC (maturity value is known) to replenish the money market fund. If the GIC is not used for income, it will be reinvested for a guaranteed period of two years.  

This strategy means that, unless we have a stock market decline that lasts more than three years, you should not be forced to take income from your investments while they are declining in value. Thus, when the stock market is declining, you have some comfort in the knowledge that you will not be digging into the capital (for at least three years) and hopefully, you will have enough fixed-income investments to weather the storm. 

This strategy only works because you avoid taking income from any part of your portfolio that is declining in value.

Joan’s portfolio must be monitored each year, as you must also decide whether to take the following year’s income from the fixed-income portion of the account or the growth portion of the account. In the years when the market earns extraordinary returns, not only should you use this growth for income purposes, but you should also take additional funds from the growth account to add to the fixed-income portion of your account, thus rebalancing your portfolio.