Bob (44) and Joyce (42) currently have $315,000 saved within their TFSA and RRSP (great job). They also own their home that they purchased in 2014, and have a $450,000 mortgage owing on the property.
They want to know if they are on the right track, and below are their most important goals including a paid off home, and the ability to spend $100k in retirement without running out of money.
Based on their current situation we found they will run out of money in their 70's and be forced to downsize or use the equity in their home to fund the rest of their retirement. Not the end of the world, but certainly not ideal.
How do we bridge the gap? How do we get Bob and Joyce closer to their financial goals?
Bob and Joyce do have excess cash flow that can fund monthly contributions to their TFSA and RRSP accounts. However, they aren't sure that it will make a difference. They agree they can both contribute $5k ($416 monthly) to their TFSA's and $10k ($833 monthly) to their respective RRSP's on a yearly basis.
As a result of their contributions
Total Financial Assets in 2043 (retirement age)
TFSA's: $752,000
RRSP's: 1,400,000
What does that look like now?
Real assets = Primary Residence
Liabilities = Mortgage
Registered = RRSP's
What I'm looking for in this chart is zero red later in retirement. That tells me that they don't run out of money, and that their financial assets are able to successfully fund their retirement spending goal of $100k every year (adjusted for inflation).
'Great - so can we see which accounts will fund our retirement?'
Of course, let's take a look.
Now that we know you won't run out of money we can begin to analyze which accounts to draw from first, and what that actually looks like.
Here we can see which accounts fund their retirement spending ($100k) and at what age. You can see the income need increase over the years and that's because we also factor in the cost of living going up, which means we'll need a bit more money each year to maintain the same standard of living (inflation is 2.10% in this report).
We can see their government benefits kick in (CPP and old age security) which is a nice income stream, but note that we've also decided to draw from their RRSP's first. We're not waiting until 71 like many Canadians do.
The RRSP's are actually more flexible than many Canadians tend to believe. Many Canadians think their is a limit on what you can take out of an RRSP, and that you can only access them later on in retirement (not the case). When you decide to flip your RRSP to a RIF (retirement income fund), you have full control of how much you'd like to draw out.
With that said, once you flip to a RIF you must draw a minimum every year based on your age (or you can elect to use your spouses age).
By depleting RRSP assets first for Bob and Joyce it gets rid of a large tax liability for the last surviving spouse. Assets within an RRSP or RIF are treated as income when you pass, and therefore could be subject to taxation at the highest marginal tax rate (roughly 54%). As a last surviving spouse, that can be a large tax bill on a six figure RIF (something I see quite often).
By using those assets first, Bob and Joyce will likely die with a large TFSA balance that will go directly to their intended beneficiaries, without any tax being taken by the government. Their TFSA's also act as an excellent source of flexibility throughout their retirement, should they decide to spend more money one year or gift the money - they can.
Based on these projections:
Our goal is overfunded.
Which means they can retire sooner, save less, or spend more money in retirement. If they would like to explore these options, I can run the numbers and build out different scenarios for their consideration - very easy.
Final Thoughts
Tax efficiency is something that we can control, and the use of TFSA's and RRSP's in this situation is great way to build wealth, without being interrupted by taxes.
The equity in their primary residence gives Bob and Joyce peace of mind, and the ability to downsize at any point, should they choose (tax exemption on the sale of primary residence).
By depleting their RRSP assets first, they have two very tax efficient assets later on in life, which is their primary residence and their TFSA's. Both are excellent assets for estate planning.
Financial planning in your 30's and 40's will put you in a great spot in your 50's and 60's. Not to mention, significantly reduce financial uncertainty.
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