As we approach retirement, we always tend to wonder if we have accumulated enough savings to live out our retirement years as we wish. If the amounts are important, the disbursement strategy is often just as important, because it can really change the situation.
The situation
Brian*, 61, works part-time and plans to continue doing so until around age 65 or 68, when he will retire. His plan: to live about five months a year in the sun from the age of 65 to 75. He plans to go to Southeast Asia, where the cost of living is much lower than in Quebec.
While he would receive $532 per month from the Quebec Pension Plan (QPP) at age 65, he plans to apply for it only at age 70 in order to benefit from the bonus. He plans to apply for his Old Age Security (OAS) pension at the same age. He plans to spend more money until age 75 and younger after that. For the moment, he estimates his cost of living at $45,000 by adding his gross salary of $30,000 and approximately $15,000 in interest on his investments each year. He wonders if his plan is realistic.
“How much money per year could I live on between the ages of 65 and 75 to be decent in the following years? Consider that the majority of my assets are what is in my registered retirement savings plan [REER]in my tax-free savings account [CELI] and in my unregistered savings, consists of shares. So these economies are constantly threatened by the economic situation. At the moment it’s not very worrying because I don’t need to disburse them, but it will be the case later. »
Numbers
- Self-employed income: $30,000
- Interest income: $15,000
- Condo: paid, value of $445,000
- RRSP: $203,313, 80% shares
- TFSA: $94,628, 80% shares
- Unregistered savings: $223,883, shares
- Unregistered savings: $43,414, bonds
- Bank accounts: $23,500
- Unused TFSA contribution room: $18,000
Carefully assess your cost of living
The first thing that Marie-Ève Mc Lean, independent financial planner and group savings representative attached to Mérici Services Financiers, wants to clarify in Brian’s case is his cost of living.
“It’s not $45,000,” she says. He has several things to pay from his gross salary that he will not have to pay once he retires, she says. For example, because he is self-employed, he must pay the employee’s and employer’s share of the QPP and the Quebec Parental Insurance Plan. Then there is tax. I estimate that its real cost of living is more like around $30,000. »
PHOTO SARAH MONGEAU-BIRKETT, LA PRESSE ARCHIVES
Marie-Ève Mc Lean, independent financial planner and group savings representative attached to Mérici Services Financiers
After making a retirement projection with the information she has on hand following the standards of the Institute of Financial Planning, she estimates that he could live on at least $50,000 net for his first 10 years at the retirement. Then he would maintain his current standard of living of $30,000 net until age 94. To achieve this, however, he would need to put a few strategies in place.
Get the Guaranteed Income Supplement
The financial planner calculated that Brian could get a share of the Guaranteed Income Supplement (GIS) if he disburses his investments optimally. “For this to be possible for a single person, you must have a net income, which excludes OAS, of less than $21,624,” she specifies. He must therefore take into consideration his QPP pension, his RRSP withdrawals and his investment income. »
As RRSP disbursement is not obligatory before age 72, Marie-Ève Mc Lean would wait until that time before touching it. She would instead advise him to draw on his non-registered savings which, unlike the RRSP, are not taxed on the capital disbursed. Thus, during withdrawals, only a capital gain or loss will be calculated in his income, in addition to his $15,000 in investment income.
“Thus, he could apply for his OAS at age 65 and also obtain approximately $3,305 from the GIS during the first years of his retirement while he would have a very low income,” she explains. This option would also allow him to continue to work a little part-time until age 68 since the SRG provides an exemption on the first $5,000 of work income earned, in addition to only considering 50% of the next $10,000. »
For his QPP pension, she would advise him to apply for it at age 72; he would thus obtain the maximum bonus of 58.8%, while having his SRG for as long as possible.
Reduce your investment income
Brian’s GIS could be even higher if his investment income were lower. In 2024, the most a single person can receive is $12,785, and each dollar earned reduces the GIS by 50 cents. In order to maximize it, Marie-Ève Mc Lean advises Brian to adopt strategies to reduce his investment income. One of them is to maximize your TFSA since the amounts grow tax-free.
“So, he should take out as much money as possible from his non-registered investments to invest them in his TFSA which does not affect his GIS,” she says.
The financial planner also suggests that Brian review his asset allocation. “Anything that is fixed income, like bonds, gives interest taxed at 100% while the capital gain is taxed at 50%,” she explains. It would therefore be preferable to keep stocks in your non-registered account and favor fixed-income securities in your TFSA. »
Corporate category funds could also be considered. “These funds convert interest and foreign gains into capital gains,” indicates Marie-Ève Mc Lean. Additionally, they typically make fewer distributions, resulting in the investor having less income to report each year. »
Finally, she points out that if he has an investment advisor, the fees paid for the management of his non-registered accounts can be deducted from his income.
Consider a life annuity
While she sees that Brian is worried about market volatility considering that he has a lot of stocks in his portfolio, the financial planner suggests that he buy a life annuity for the equivalent of 15 or 20% of his wallet.
“Purchasing an annuity will in some way replicate what a retirement plan would have done,” she explains. She will offer him fixed payments that he will receive for life. This will give him a little more peace of mind since the amount will no longer depend on the stock markets. He can also choose an indexed annuity. This will be in addition to his government pensions which are also indexed and guaranteed for life. It will thus be better protected from the risk of longevity. »
Of course, several details in Brian’s situation could change the situation.
“He would benefit from having a tailor-made strategy and always informing his advisor if a change occurs in his situation, for example if he is no longer single,” indicates Marie-Ève Mc Lean. But he can still be reassured. He’s in a good situation. »
* Although the case highlighted in this section is real, the first name used is fictitious.