Darlene is a 70-year-old college professor who plans to retire next summer. Her income is strong: $ 102,000 a year plus an additional $ 13,000 a year from the Canada Pension Plan and Old Age Security (OAS). She opted to keep working until now to pay down some liabilities. After going through a divorce eight years ago, Darlene needed to buy out her ex-husband’s share of the family home and assumed a small mortgage. The mortgage, on a line of credit at 3.35 per cent, is now down to $ 33,000. Her home is valued at $ 550,000.
Darlene will also get a one-time $ 50,000 retirement bonus. She also has $ 66,000 in her Registered Retirement Savings Plan. While Darlene has a financial advisor, she is not sure if the investments in her RRSP are the best ones for her situation.
Since her retirement income will come from many sources, Darlene needs help sorting through the pieces. The Star asked Robyn Thompson, a fee-only certified financial planner with Castlemark Wealth Management, to work with Darlene.
Darlene’s biggest retirement challenge will be tax efficiency and keeping her income at a level where she will still receive all of her OAS. OAS is clawed back once income rises above $ 71,592. While Darlene appears to be within the qualifying bracket at $ 64,000 a year, her bonus will increase her income above the OAS threshold, Thompson says.
Darlene must declare $ 20,000 of her bonus as income (the remaining $ 30,000 will roll into her RRSP). Thompson recommends deferring her bonus until January 2016. Doing so will allow her to save $ 4,500 in taxes and reduce her OAS clawback by $ 1,600. Thompson estimates that Darlene’s line of credit will be down to $ 14,000 by then. She should use the bonus to eliminate that debt.
Darlene’s RRSP is also causing her income to rise. Next year, Darlene will turn 71 and must convert her RRSP into a Registered Retirement Income Fund (RRIF). Darlene will then be required to withdraw a set amount from her RRIF each year. In year one, she must withdraw 7.38 per cent of the RRIF’s assets.
Her RRIF withdrawal amounts will be added to her taxable income each year and she’ll be taxed at her marginal rate. Darlene’s RRIF withdrawals are enough to push her annual income to just over the OAS clawback threshold.
Thompson recommends Darlene shelter any excess money not required for living expenses into a Tax-Free Savings Account. Darlene currently has $ 31,000 a year of TFSA contribution room and can contribute an additional $ 5,500 each year starting in 2015. Any return on her investments grows tax-free. But here’s another benefit: any investment income earned within a TFSA won’t impact her eligibility for federal income-tested benefits such as Old Age Security, Thompson says.
Darlene may consider herself risk-averse, but Thompson notes that she has 37 per cent of her portfolio invested in precious metals and gold, and another 17 per cent in emerging market equities. This weighting of investments actually makes her a moderate investor. “This type of equity strategy is volatile and will cause the portfolio to see moderate swings,” Thompson says.
Darlene’s advisor has not done well for her. Thompson says her investment portfolio has significantly underperformed the benchmark four of the last five years. In 2013, for example, her investment return was negative 0.68 per cent. Losses like that may be acceptable in down markets and when benchmarks are similar. But the FPX Balanced Index, a benchmark index with a similar asset allocation weighting to Darlene’s achieved a 9.18 rate of return over the same period.
With the relatively small size of Darlene’s portfolio, ETFs are a wise choice. They offer diversification across many asset classes, sectors, and countries and typically have low management expense ratios.
The client: Darlene, 70