Retirement Plan: Breaking Down A Subscriber’s Plan

October 22, 2024

Breaking Down A Subscriber’s Retirement Plan: John and Tracy’s Story

Today we are breaking down a subscriber’s retirement plan. Meet John and Tracy, a couple nearing retirement, recently completed a financial plan with their advisor. However, after following our channel and absorbing our tax-focused strategies, they sensed gaps in their plan and reached out for a second opinion. Their primary questions were: Will they run out of money? How can they minimize taxes on withdrawals? And is their portfolio set up effectively for retirement?

Step One: Assessing Their Current Plan

To provide thorough advice, we started by recreating their current plan. Here’s an overview:

Ages and Goals: John (63) plans to retire at year-end, and Tracy (61) is already retired. They plan to spend $72,000 annually on essentials plus $24,000 annually on travel for 15 years.
Contributions for Family: They aim to gift $50,000 each to their children for home purchases within the next few years.
Income Sources: Both are set to start Canada Pension Plan (CPP) and Old Age Security (OAS) benefits at age 65.
Investments and Accounts: They have a combined $1.8 million across Tax-Free Savings Accounts (TFSAs) and non-registered accounts and $1.25 million in Registered Retirement Savings Plans (RRSPs). Their portfolio follows a 60% stock, 40% fixed income allocation with an anticipated 5.22% return.

Given these parameters, their advisor estimated they would be 113% funded, meaning they could afford a slightly higher lifestyle if desired.

Key Observations and Areas for Improvement

At first glance, this plan appeared solid but missed key efficiencies. Here’s how we improved it:

Maximizing TFSA Contributions
John and Tracy each had unused TFSA room of $40,000. By transferring $40,000 from their non-registered account to their TFSAs, we ensured that more of their portfolio grows tax-free, reducing annual taxable income.
OAS Timing Consideration
We agreed with starting OAS at 65. Though deferring to 70 could technically provide more value, OAS lacks a survivor benefit. If one spouse passed, their OAS benefits would cease, so starting earlier ensures both benefit.
Optimizing CPP with RSP Meltdown Strategy
Here, we recommended deferring CPP to age 70, which allows for more substantial monthly benefits and creates room to execute an RRSP meltdown. This strategy lets them withdraw from RRSPs strategically, avoiding high tax rates later in life. By targeting an annual taxable income of $54,000, they minimize taxes now while maximizing CPP benefits later.
Adjusting Portfolio Structure
Although a 60/40 stock-to-fixed-income ratio is ideal for their age, we optimized by allocating assets based on withdrawal plans. For example, we made the TFSA more aggressive since they won’t need to touch it immediately, letting it grow tax-free.

With these changes, John and Tracy’s revised plan now has 119% funding and an estate value projected at $1.9 million, up from $1.33 million. Not only does this strategy increase their confidence in covering expenses, but it also leaves a larger legacy for their family.

The Power of a Comprehensive Review

By examining John and Tracy’s plan with a fresh perspective, we uncovered simple adjustments that led to significant financial gains. If you’re planning your retirement, consider these essential steps: