David and Felicia, newly retired, aim to optimize their $3.14m portfolio and manage taxes effectively
David and Felicia, aged 64 and 54 respectively, have recently retired and, at first glance, appear to have sufficient funds to sustain their desired lifestyle.
However, they worry about growing their nest egg, saving on taxes, and obtaining a different financial perspective, according to The Financial Post.
Felicia holds dual Canadian-United States citizenship, and David has US status. The couple, who are business partners, have spent about seven months each year in Ontario and the remaining five months in the southern US for the past decade, a pattern they wish to continue.
They have investments with brokerages in both Canada and the US, as well as self-directed accounts, amounting to a portfolio worth approximately $3.14m. As newly retired individuals, they want to ensure their financial strategies are sound.
“Having worked with the same advisers for more than 20 years, we also want a different perspective,” David said.
David retired earlier than expected two years ago due to a neuromuscular disease, forcing the closure of their renovation business.
They are still adjusting to retirement and managing their income. “Last year was my first full year of not working,” David said. “I now have multiple sources of income from pensions and investments, and it’s hard to know what my income will be going forward.”
In 2023, their combined pre-tax annual income was about $130,000, including $62,090 in dividends, $4,980 from the Canada Pension Plan (CPP), $29,027 in Social Security benefits and a former employer pension, $10,000 in interest income, and $3,000 from Felicia’s part-time work.
Financial planner Ed Rempel believes David and Felicia are in a strong position. He estimates they need $1.7m in investments yielding six percent to maintain their lifestyle.
“Their current lifestyle costs them $96,000 a year after tax, excluding TFSA contributions, which can be made by transferring non-registered investments,” he said.
“They are 93 percent ahead of their goal. This means they can afford annual lifestyle expenses of $130,000, giving them an extra $35,000 each year to enjoy life.”
To reduce their tax burden, Rempel suggests that transferring stock to an investment account in Felicia’s name does not allow for income splitting.
“The investments are still David’s, so the income would be ‘attributed’ back to David, unless they can reasonably show the money for those investments originally came from Felicia,” Rempel said.
Rempel advises equity investors to start their OAS and CPP at age 65, while conservative investors should delay these benefits until age 70.
“Delaying CPP from age 65 to 70 gives you an equivalent of a 6.8 percent annual return on your investments over your expected life, which is less than equity investors are likely to earn, but more than conservative investors,” he said.
Rempel’s primary advice for David and Felicia is to create a financial plan to clarify their risk tolerance, desired returns, and tax efficiency. This plan will help them make informed decisions and feel confident about their future.
“They can decide together on the lifestyle they want, how to invest, how to minimize lifetime taxes, and how to structure their retirement income,” he said.
Rempel also warns that annuities typically yield lower returns than equities and carry a significant long-term risk of inflation erosion. “They are perceived as risk-free but would have lost money after inflation for 40 years from 1940 to 1980,” he noted.
Rempel emphasizes the importance of investment returns after fees. “If their adviser can help them achieve higher growth after fees than they could on their own, then the fees are justified,” he said.
Disclaimer: The names ‘David’ and ‘Felicia’ have been changed to protect their privacy.
