Gilles* and Huguette* are having trouble navigating the process of disbursing their retirement income. Should they favor the Guaranteed Income Supplement (GIS) in their calculations?
Posted at 6:00 a.m.
The situation
When retirement income comes from different sources, the calculations are complex and no one wants to be wrong… And leave money on the table.
Gilles, 61, retired last December. His former employer had offered him a defined contribution plan. He therefore withdraws from the labor market with an amount that he must manage himself wisely to have enough for the rest of his life.
“I have decisions to make about my employer’s pension plan,” writes Gilles. I have to decide if I start cutting it now or wait. »
To avoid any missteps, Gilles has not yet applied for his pension from the Quebec Pension Plan.
On the other hand, his common-law spouse, Huguette, 68, has been retired since 2013 and can count on a defined benefit plan.
“We would also like to know if a net cost of living of $75,000 per year including various trips is possible until an advanced age”, wonder the lovers, in a relationship for 25 years, and without children.
“Given that since December 2021, I have had no income except that which comes from the second apartment of our duplex, our main residence, specifies Gilles, should we apply for the Guaranteed Income Supplement? »
Numbers
Gilles, 61 years old
- Value of defined contribution pension plan: $141,000
- RRSP: $252,000
- TFSA: $103,000
- Non-registered investments: $172,000
- Savings account: $8,000
- Co-owner of a mortgage-free duplex
- Market value: $600,000
- Rental income: $500 per month (50% each)
Huguette, 68 years old
- QPP: $490 per month
- PSV: $642 per month
- RREGOP: $616 per month
- RRSP: $147,000
- TFSA: $97,000
- Non-registered investments: $73,000
- Savings account: $20,000
Analysis
Pierre-Raphaël Comeau, an expert wealth management advisor for Laurentian Bank Private Wealth, used sophisticated software to determine whether or not Gilles should apply for the Guaranteed Income Supplement (GIS).
“The Guaranteed Income Supplement (GIS) provides a tax-free monthly payment to low-income Old Age Security recipients living in Canada,” the government website states.
“The GIS is intended for the most disadvantaged people in society. As a financial planner, my job is to find the best solution for my client without value judgment,” says Pierre-Raphaël Comeau.
PHOTO ANDRÉ PICHETTE, LA PRESSE ARCHIVES
Pierre-Raphaël Comeau, Expert Advisor in Wealth Management for Laurentian Bank Private Management
If it is not only the poorest who use it, is it the fault of the client who is trying to optimize his tax situation or that of the government which should reform its system? It is a social debate.
Pierre-Raphaël Comeau, Expert Advisor in Wealth Management for Laurentian Bank Private Management
In this case, Huguette, who is older than her spouse, was already entitled to it, because the couple’s annual income was less than $46,656 before Gilles retired.
“I made a first scenario in which they will seek the SRG for the next three years”, explains the planner.
This is detailed as follows: $7,000 annually from Huguette’s RREGOP, $6,000 from Huguette’s Quebec Pension Plan and $6,107 in rental income. If we add $10,000 from non-registered investments, we reach $29,000.
This is the threshold for Gilles to be entitled to the GIS. He would have $365 a month.
The GIS, yes or no?
“The GIS is not taxable. It is the Holy Grail, the goose that lays the golden egg of non-taxable income”, illustrates Pierre-Raphaël Comeau.
However, the couple is only entitled to it for three years. At age 71, Huguette must disburse a minimum of RRIFs.
Paying no taxes for three years seems like a fantastic strategy…at first glance.
Pierre-Raphaël Comeau went back to his software to create a second disbursement scenario, but without worrying about the SRG.
“I made a smart disbursement,” says the expert.
To compare the two scenarios, he took Gilles’ 90 years and Huguette’s 97 years as the deadline.
“In today’s dollars, the scenario with the GIS ends up giving $12,000 more. While with the smart disbursement, we arrive at $37,000. It is therefore three times more profitable. In 2051 silver, that gives a difference of $66,000,” explains Pierre-Raphaël Comeau.
He specifies that the calculations are related to this particular case. “That doesn’t mean it will always be the case if the tax rules change. »
Smart disbursement
From age 61 to 65, the planner suggests that Gilles withdraw $26,000 per year from his former employer’s plan and use non-registered investments to achieve the desired cost of living.
Why cash out the defined contribution RPP right away? Because after age 65, Gilles will have to respect a maximum amount in his annual withdrawals. We must jump at the opportunity before this deadline, says the expert.
From age 66 to 69, Gilles would have to withdraw $18,000 from RRSPs and non-registered investments.
When at age 70 the non-registered investments will be exhausted, the result will be a clever mix of TFSAs, RRSPs and the remains of the defined contribution RPP.
“The reflex is to get rid of the unrecorded as quickly as possible. And the RRSP swells and the bill comes later. »
“It’s better in this case to pay a little tax as you go along”, assures the specialist.
Does the cost of living hold up?
According to the expert wealth management advisor’s calculations, the couple will have ample means to support a living cost of $75,000 per year.
“Up to age 90, they can even go up to $82,500 without a problem, if they take the second scenario. If they opt for the first, this cost of living is no longer possible at age 86. »
However, Gilles and Huguette will still have the duplex, which in 22 years could be worth 1 million. They would therefore have the possibility of selling it.
“It’s normal to be anxious about the disbursement, assures the planner, because each time you make a decision, it has repercussions. »
If he sells the duplex, the couple will still have money for up to 100 years.
* Although the case highlighted in this section is real, the first names used are fictitious.
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