How do you envision early retirement without an employment-related pension plan? How to optimize the financial and tax planning of this next retirement during the last years of employment income? These are the concerns of François *, 60, in relation to his plan to retire within three years of his gainful employment – around $ 180,000 per year – but without any pension plan.
The situation
“I want to retire from work at age 63, so two years before the start of public pension benefits (Quebec RRQ and federal PSV). And during these two years before 65, I plan to resell my house in the city to buy a small property at a lower cost in a resort region ”, explains François during a conversation with Press.
“But without a pension plan, will I have the means to finance a retirement lifestyle expected to be around $ 45,000 per year after my 65th birthday?e birthday ? Otherwise, how do I go about optimizing my retirement savings over the next few years? Asks this single man with no children or other dependents.
At first glance, François’ balance sheet in financial assets, valued at $ 455,000 (RRSP, TFSA, savings account), seems relatively well provided. And that’s not counting the equity in his town house, around $ 600,000, after the mortgage balance of $ 150,000.
However, considering the high amounts of unused contributions in his RRSP ($ 168,000) and the cash in his current savings account ($ 85,000), François needs advice on financial and tax optimization of his savings. -retirement during his last years of employment income at high tax rate.
At the same time, François seeks advice on the best use of the net cash gain – around $ 200,000 – which he anticipates after the resale of his house in the city and the purchase of a residence in the countryside “for $ 350,000 to $ 400,000. “.
Numbers
François *, 60 years old, single early retiree, without children or other dependents
Financial assets
- in a registered retirement savings plan (RRSP): $ 266,000
- in tax-free savings account (TFSA): $ 108,000
- in a non-registered investment savings account: $ 5,000 (units of the Fonds de solidarité FTQ)
- in current savings account: $ 85,000
Non-financial assets
House: approximately $ 700,000
Passive
Mortgage balance: $ 150,000
Annualized revenues
Employment: $ 180,000
Main annualized disbursements
- housing related: $ 38,000
- personal lifestyle: $ 25,000
- related to savings in registered accounts (RRSP, TFSA): $ 30,000
Advice
PHOTO ALAIN ROBERGE, THE PRESS
Alexandre Beaulieu, financial planner and financial security advisor (annuities, insurance) at the firm DMA Gestion de Patrimoine
François’ situation and concerns were submitted for analysis and advice to Alexandre Beaulieu, financial planner and financial security advisor (annuities, insurance) at the firm DMA Gestion de Patrimoine, in Brossard, in the southern suburbs of Montreal.
Alexandre Beaulieu is also a member of the board of directors of the Quebec Financial Planning Institute (IQPF).
“At first glance, I see that François’ financial planning for his retirement lacks room to maneuver in terms of his income, if ever the returns on his investment savings (RRSP, TFSA, etc.) prove to be lower. expectations ”, warns Alexandre Beaulieu straight away.
In return, he noted two favorable elements for the optimization of this financial retirement planning.
With his current lifestyle around $ 63,000 per year, and his net employment income [après impôts] relatively high, François has a good savings capacity of around $ 45,000 per year.
Alexandre Beaulieu, financial planner and financial security advisor at DMA Gestion de Patrimoine
On the other hand, continues Alexandre Beaulieu, “with a net income and a retirement lifestyle expected to be around $ 45,000 per year, the marginal tax rate (IMR) on François’ retirement income is announces 12 percentage points (to 37%) lower than its current IMR (49.9%) on its high employment income. However, such a difference in TMI turns out to be interesting for optimizing François’ retirement savings during his next years of pre-retirement and the start of retirement ”.
Consequently, continues Mr. Beaulieu, the “first piece of advice for François is that he continue to maximize his annual contributions to his registered savings accounts, in priority his RRSP”.
Why ?
“Considering its marginal tax rate (IMR) on its employment income, it is very important to make the most of its unused contributions [estimées à 168 000 $] to his RRSP for the next three years before his retirement, while keeping a minimum of liquidity in emergency funds, ”indicates Mr. Beaulieu.
RRSP loan strategy
He also suggests that François consider a short-term “RRSP loan strategy” in the event of insufficient cash flow to cover all his unused RRSP contributions by the end of his high-tax employment income. .
“This RRSP lending strategy could be achieved by taking out a low-interest home equity line of credit. François will be able to use his tax refunds to repay this line of credit, ”explains Alexandre Beaulieu.
Subsequently, it is the sale of his residence in the city and the purchase of another in the countryside that François plans to do during his first years of retirement (between 63 and 65) that should provide him with a net gain in income. approximately $ 200,000.
“I suggest that he plan the use of this capital in order to further enhance his financial assets in non-registered retirement savings, in particular by investing in mutual funds in corporate classes (FCPS),” indicates Mr. Beaulieu.
“The main feature of FCPS sits very well with someone on the threshold of retirement, as they offer attractive tax attributes. Essentially, FCPS convert fully taxable investment income, such as foreign interest and dividends, into capital gains at a lower tax rate. And this without increasing the overall risk of the investment portfolio. ”
Deferral of government pensions
“François told us that he had no dependents or children. This leads me to believe that the greatest risks in his financial planning for retirement are his life expectancy, inflation and returns, ”points out Alexandre Beaulieu.
However, “one of the most optimal ways of alleviating these risks is to postpone government pensions to Quebec (RRQ) and to the federal government (PSV)”.
What are the advantages of such a postponement?
Postponing these government pensions from 65 to 70, for example, will increase the amount of these pensions payable for life by around 42% for the provincial QPP and 36% for the federal OAS.
Alexandre Beaulieu, financial planner and financial security advisor at DMA Gestion de Patrimoine
“Such an increase in these guaranteed annuities for life is greater than the return that he could expect in his investments in retirement savings. In addition, these subsidized pensions could reduce the financial risks of François when he reaches an advanced age, and that he will have to resort to external assistance – and paid – in case of inability to take care of him. himself or to manage his property. “
In return, notes Alexandre Beaulieu, the deferral of government pensions means that François’ retirement income before age 70 would come entirely from disbursements and returns on his financial assets in retirement savings.
“This strategy fails to reduce the amount of assets that could be left as a legacy. But François being single and without children or dependents, he did not indicate any particular project in matters of inheritance. ”
* Although the case highlighted in this section is real, the first names used are fictitious.
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