If the planets are aligned just right, when you reach retirement you may find yourself with almost zero chance of outliving your money.
You have worked hard, you did some smart things, and maybe you had some good fortune along the way as well. Now you have determined that you likely have more than you will ever need.
If that is your situation, you likely have two key questions to answer:
1. What is the smartest way to fund your monthly expenses?
2. What do you do about all the extra money that you will likely not spend?
The first question used to be very simple. You had savings, and if you needed to, you would draw from your savings or investment account. Then came RRSPs, then came TFSAs and the simple answer became complicated. Suddenly people are talking about using a line of credit on your home or drawing down funds more quickly from a holding company; you have to decide whether to take CPP early or late; and you can even delay receiving Old Age Security if you want. There is a lot of juggling going on.
Unfortunately, there isn’t a one-size fits all answer, but the following are some ideas that many people do not think about:
- Do not just aim to pay the lowest tax this year. Think about your lifetime tax bill: Sometimes, by delaying drawing taxable money, you are leaving yourself in a situation where you will have a large RIFF at the end that you never used, and that will be taxed at almost 50 per cent upon your passing.
- Think outside of the box. Sometimes it is better to draw money on a line of credit and pay three per cent than have to pay 40 per cent in taxes and get your OAS clawed back.
- If you are married, sometimes getting income to be equal is not the best solution. It may make sense for one spouse to have a higher income (but at the same tax band) if they are under 65, allowing the couple to maximize lifetime OAS.
- Spousal RRSPs can sometimes allow one spouse to draw down RRSP assets (at least three years after they were contributed) at a much lower tax rate than the tax refund earned when the funds were contributed by a high-income spouse. In some cases, these withdrawn funds from one spouse can still be contributed again at a higher refund rate by the other spouse to their own RRSP — if they still have the room.
The end goal of this planning would be to cover all your cash flow needs while leaving you paying a little less tax, avoiding any government clawbacks and, as a result, leaving you with more money along the way.
This leads to the second key question. If you have more than you will need, then why do you care about having even more? Quite frankly, some people don’t care that much and that is OK. But most people have spent many years working towards this situation and want to continue to do the smartest things they can with their wealth.
I always tell clients that this extra money can only go to three places:
1. You can spend more on yourself.
2. You can give more to others — both while you are alive and once you have passed away.
3. You can give extra to the government — both now and in the future.
If you are like most people, you tend to eliminate the third option, leaving you with just two.
In the 1700s British author Samuel Johnson said, “It is better to live rich than to die rich.” Based on that philosophy, where possible, I usually encourage people to try to spend more on themselves in their healthy retirement years. Especially when you are relying on the decent health of both members of a retired couple, there are often only 10 to 15 years of retirement with decent health. The challenge is that for many retirees, if they have lived to that point as savers rather than spenders, changing their habits can be difficult — even when they know they can financially support more spending.
This leads to the other option: giving more to others. If your money is eventually going to your children after you pass away, and you are quite certain that you have more money than you need in your lifetime, there are many advantages to giving some of it away earlier. The first is that you can see the benefits while you are alive. In addition, often the funds will be of greater value to your 40-year-old child than to the same child when he or she is 60. Lastly, by moving some funds from your hands to your children, there are often some tax benefits. In addition to avoiding some probate fees, if your child is in a lower tax bracket or has high interest debt they can pay off, the dollars will go further in your child’s hands than they will sitting in your investment account.
If you are so inclined, there are also many charities that could benefit greatly from financial support. Just like with your family, it can be much more rewarding to give with a warm hand than to leave money in your will. The main reason that more people don’t do this is that they still carry some fear of outliving their money. For many people this is quite reasonable. But for many high-net-worth individuals, especially those who have done some detailed financial planning, putting off major giving until after death doesn’t make a lot of sense.
With all of these options and complications, it turns out that a wealthy retirement is not necessarily a simple retirement. But, with some thought and effort, the wealth that you worked so hard for can often do more to enhance your life and that of those around you.