The article “Can Lucas and Shelby afford to give $100,000 to each of their kids for a first house?” was originally published on the Globe and Mail on March 28th 2023 by Dianne Maley.
Lucas and Shelby are both teachers, earning a combined $210,750 a year. They have defined benefit pension plans that will pay them a combined $125,000 when they are both retired next year. Lucas is 54, Shelby 53. They have two children in university.
When they retire from work, Shelby and Lucas plan to buy a motor home ($200,000) and “travel North America,” Lucas writes in an e-mail. Lucas plans to retire this summer and Shelby next spring, both with unreduced pensions.
In addition to their southern Ontario house, they have three rental properties, all with mortgages. The properties are cash-flow neutral. They are thinking of selling one in a year or so.
Longer term, they want to travel internationally, help their children buy a first home and take family ski trips each year.
“We want to give our children $100,000 each to help them buy their first house,” Lucas writes. “How much can we spend each year in retirement?”
They are also seeking suggestions to minimize income tax in retirement. “We have always managed our own finances and investments,” Lucas adds. “In retirement, would you recommend we seek ongoing advice from a professional to help manage our money?”
We asked Andrew Dobson, a certified financial planner at Objective Financial Partners Inc. in Markham, Ont., to look at Lucas and Shelby’s situation.
What the Expert Says
Lucas and Shelby want to help their children buy a first home. They also want to buy an RV. Some time in the next year or two, they plan to sell one of their rental properties.
“The logical source of capital would be the sale of the $850,000 property next year,” Mr. Dobson says. Estimated expenses on the sale: capital gains tax ($150,000 to $200,000), mortgage ($250,000) and closing costs ($25,000). “I would estimate net proceeds of at least $400,000,” the planner says. That would be enough to give each child $100,000 and buy a $200,000 motor home.
Once they retire, their combined pensions will be more than enough to cover their existing lifestyle spending of about $69,000 a year. Their incomes will rise as more income sources come on stream at different intervals. “Factoring other income such as Canada Pension Plan, Old Age Security and RRIF withdrawals (registered retirement income funds) could increase their budget to more than $120,000 annually until age 95,” Mr. Dobson says. Even if they spent that much, by age 95 they would still have the family home plus the remaining two rental properties, he says.
How people structure their income can also help minimize taxes paid by the estate when they die, Mr. Dobson says. “Higher taxes at death can be reduced by triggering income during one’s lifetime; for example, unrealized capital gains or RRSP/RRIF withdrawals.” RRSPs/RRIFs and nonregistered assets can be passed on to one’s spouse at death on a tax-deferred basis, he says. On the passing of the second spouse, these accounts will be assumed to be sold. As a result it may be beneficial to layer this tax burden over time rather than have the estate pay all the tax – likely at the highest marginal tax rate.
Canada Pension Plan benefits can be taken as early as age 60 and as late as age 70, the planner notes. Old Age Security can be taken as early as age 65 and as late as 70. “Lastly, your RRSPs must be converted to RRIFs in the year you each turn 71, with mandatory minimum payments starting the following year.” Because their pensions more than cover their expenses, Lucas and Shelby could choose to delay CPP, OAS and RRSP conversion into their 70s, Mr. Dobson says.
“The potential problem with that is that they may end up in a situation where they are in lower tax brackets in their early retirement, moving into higher brackets as they start these cash flows.” So it may make sense to draw on some other income sources early in retirement – over and above their pensions – and then layer in other cash flow sources over time.
“Since RRIF minimum withdrawals are based on an increasing percentage each year, you run the risk of clawing back OAS significantly,” he says. Old Age Security begins to be clawed back when income exceeds about $82,000. By drawing down RRSP/RRIF assets early in retirement, the mandatory minimums will be lower later on because the size of the RRIF will be lower.
A measured approach, Mr. Dobson says, would be to supplement pension income with RRSP withdrawals (or partial conversion of RRSPs to RRIFs and withdrawing from them), before age 65. They could take OAS at age 65 and defer CPP to age 70.
Do Lucas and Shelby need professional financial advice?
They manage their own investments with about 65 per cent in stocks and 35 per cent in bonds, spread over five exchange-traded funds.
“Traditional financial advisers tend to sell investments and insurance products, which may be of limited interest and need to Lucas and Shelby if they are adequately insured and manage their own investments,” the planner says. If they decide to consult a professional, Mr. Dobson suggests they choose an adviser that offers comprehensive tax and estate planning advice “as primary offerings rather than afterthoughts once the money has been invested.”
A financial planner with experience in tax and estate planning could be beneficial in reviewing any potential gaps they may have in their plan, he says. “Effective retirement income planning in the early stages can … provide hundreds and eventually thousands of dollars in tax savings.”
The People: Lucas, 54, Shelby, 53, and their two children, 20 and 22.
The Problem: Can they afford to retire early, give each of their children $100,000, buy an RV and travel extensively? How much can they afford to spend? What can they do to keep taxes to a minimum? Should they get professional advice?
The Plan: Use proceeds of the planned rental property sale to give $200,000 to children and buy a motor home. Draw down some of their RRSP savings as soon as they retire to keep taxes lower later and avoid or reduce Old Age Security clawback. Add income sources gradually, starting with OAS at age 65, Canada Pension at age 70 and then mandatory RRIF withdrawals in the year they turn 72.
The Payoff: A road map to a tax-efficient retirement income withdrawal plan.
Monthly net income: $13,090.
Assets: Bank $10,000; share of family cottage $200,000; his TFSA $45,000; her TFSA $1,000; his RRSP $156,000; her RRSP $131,000; registered education savings plan $5,000; residence $1,200,000; three rental properties $2,400,000; estimated present value of his DB pension $1,530,000; estimated present value of her DB pension $1,160,000. Total: $6,838,000.
Monthly outlays: Property tax $520; water, sewer, garbage $125; home insurance $100; electricity $125; heating $150; maintenance, garden $140; car insurance $500; fuel $400; other transportation $150; gifts, charity $300; vacation, travel $1,160; other (lessons) $500; dining, drinks, entertainment $600; personal care $20; golf $180; pets $150; sports, hobbies $50; subscriptions $50; health care $40; cellphones $320; cable, satellite $170; pension plan/payroll deductions $2,685. Total: $8,435. Surplus goes to tax-free savings accounts, unallocated expenses and nonregistered savings.
Liabilities: Rental property mortgages $1,200,000 at 2.8 per cent.