Kelvin and Rosita have a mortgage-free house in the Greater Toronto Area and substantial savings.Sammy Kogan/The Globe and Mail
Kelvin and Rosita are both 64 years old and they have four adult children. The youngest is still living at home and going to university.
They have a mortgage-free house in the Greater Toronto Area and substantial savings.
Kelvin plans to retire from his $250,000-a-year executive position in the spring of 2027. He’ll continue his part-time management consulting business, which generates $90,000 a year gross. “I’ll keep going until 70 at least,” Kelvin writes in an e-mail, “longer if I’m still enjoying it. It’s fun, I get to help people, it offers good social connections, keeps my brain active and it pays well.”
In addition to his salary, Kelvin is collecting a defined benefit pension of $52,828 from a previous employer, indexed to inflation. He’ll get a second defined benefit pension of $46,760, also indexed, when he retires.
Short term, the couple plan to travel and spend more time with family. They also want to help their children financially and “begin the tax-efficient transfer of wealth to our kids.”
“We would like to give them money along the way to help them with buying houses, paying down mortgages, investing for our eventual grandkids’ educations,” Kelvin writes.
Their retirement spending goal is $125,000 a year after tax.
We asked Warren MacKenzie, an independent Toronto-based financial planner, to look at Kelvin and Rosita’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
What the Expert Says
Kelvin and Rosita have been successful in raising their four children and in building financial independence, Mr. MacKenzie says. One of their goals is give $100,000 to each of their four children over the next few years to help them purchase their first homes.
Based on reasonable assumptions – a 5 per cent average rate of return on their investments and a 2 per cent inflation rate – Kelvin and Rosita can achieve their goals, he says. “If they live to be 100 years old, they’re on track to leave an estate of more than $2-million with today’s purchasing power.” Most of that will be the value of the family home.
Of the $400,000 the couple plan to transfer to their children, $160,000 – $40,000 each – should be used to open first home savings accounts (FHSAs), the planner says.
When Kelvin retires, Rosita should convert her registered retirement savings plan to a registered retirement income fund and begin drawing on it because it will be important for them to split pension and RRIF income, Mr. MacKenzie says. “Overall, tax paid by the family will be lowest when both spouses are taxed at the same marginal tax rate.”
In 2028, Kelvin’s first full year of retirement, the cash inflow will consist of Kelvin’s two indexed pensions totalling $106,000 a year and a $45,000 withdrawal from Rosita’s RRIF.
They will split all pension income, so cash outflow will consist of income tax of $26,000 and spending of $125,000 a year. Going forward, any shortfall will be covered by RRIF withdrawals.
Their target spending of $125,000 a year is more than 50 per cent higher than their current spending level, but they want to spend more on travel, Mr. MacKenzie says.
Because their goal is to transfer wealth to their children and grandchildren, Kelvin should consider an estate freeze for the corporation, Mr. MacKenzie says.
Here’s how it would work.
Kelvin is sole owner of a consulting corporation whose value consists of the $85,000 or so in Kelvin’s corporate bank account.
“The steps are to ask a lawyer to issue new preferred and common shares,” the planner says. Kelvin gets preferred shares valued at $85,000. “The kids are issued new common shares which initially have zero value.” But as Kelvin continues to work part time, earning about $90,000 a year in consulting revenue, this money is left in the corporation and accrues to the common shares. “Later, when the company starts to invest the available cash, its value could grow at, say, 5 per cent a year – and all this investment income will accrue to the common shares.”
“Eventually, the company is liquidated. Kelvin gets $85,000 and his children get the rest of the value as a capital gain. Since Kelvin and Rosita don’t need the consulting income, and Kelvin wants to continue working, it makes perfect sense,” Mr. MacKenzie says.
Kelvin and Rosita are both in good health, so they have delayed the start of Canada Pension Plan and Old Age Security benefits until age 70, the planner says. As a result, CPP benefits will be 42 per cent higher and OAS 36 per cent higher than if they started collecting at age 65.
Two of the couple’s four children are joint executors of the parents’ estates. “Many parents believe that any dispute over the administration of the estate is unlikely because their children get along well,” Mr. MacKenzie says. “Parents should realize that eventually children may get married and then relationships with siblings can change and conflicts over the administration of a large estate are common,” he notes. Kelvin and Rosita should consider appointing a corporate executor, he says. “It would be better for the children to be angry with a bank than to be angry with one another.”
Kelvin is a do-it-yourself investor. “He mentions that one of his goals is to manage the capital wisely and avoid the possibility of a 1929-style market crash,” Mr. MacKenzie says. Their investment portfolio is about 90 per cent in stocks. “Given that the stock market is near its all-time high, and that they can achieve their goals with a lower-risk portfolio, they are taking more investment risk than necessary,” the planner says.
But because Kelvin’s indexed pensions are more than enough to achieve all their spending goals, they can afford to take more investment risk and still not be in danger of running out of money.
Kelvin and Rosita should ensure that each of their children opens an FHSA even if a child doesn’t have the funds to immediately make a deposit. “By opening the account, they will start to create ‘carry forward’ room so that when they start working, they’ll be able to deduct their FHSA deposits from their taxable income.”
If Kelvin and Rosita live to be 100, their main asset will be their personal residence. If they decide to move to a retirement home at some point, the sale of their personal residence will be more than enough to cover the cost of a luxury retirement home.
Client situation
The people: Kelvin and Rosita, both 64, and their children, 25, 29, 31 and 33.
The problem: Can they meet their retirement spending goal, help their children financially and arrange a tax-efficient transfer of wealth?
The plan: Kelvin retires next year and continues with his corporate consulting work, leaving the proceeds in the corporation. He might consider an estate freeze as a way of passing the couple’s surplus wealth to their children.
The payoff: Peace of mind.
(Income, expense and asset values have been provided by the Facelift applicants.)
Monthly after-tax income, current: $15,750 (after pension income splitting).
Assets: Joint bank account $25,000; his tax-free savings account $150,000; her TFSA $55,000; his RRSP $214,000; her RRSP $661,000; commuted value of his DB pensions $1,400,000; residence $1,600,000; corporate account $85,000. Total: $4,190,000.
Monthly outlays: Property tax $580; home insurance, utilities $1,000; maintenance $200; transportation $800; groceries $2,000; clothing $200; charity $200; vacation, travel $800; dining, drinks, entertainment $300; personal care $250; pets $150; subscriptions $40; health care $70; communications $200; TFSAs $3,000. Total: $9,790.
Liabilities: None.
Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the people profiled.