Money Makeover – Retired with a small pension, now what?
I liken preparing for retirement like organizing ourselves for one of our big international trips – a little planning can go a lonnng way.
While any financial plan is not perfect (it will be subject to change many times over) it’s the process of planning that’s important to my wife and I – that process is helping us reach our destination. Maybe that same thinking will help you too.
Plans and goals and all that fun stuff might be good, but what if you woke up and “you made it”? Meaning, you’re retired – now the heck what?
Recently a reader wrote me and asked that very question. With her permission I’ve included some of her financial details along with the premise of her email to me below.
For today’s post I thought I would offer my take as it relates to how we’re investing long-term and potential considerations for her portfolio, to speak to a financial professional about. No doubt other readers will have some perspectives as well.
Reader: Made it (to retirement) Mary
Mark, thanks for your site. Now that we’re retired (finally, yes!!!) it’s a bit overwhelming to go from savings mode to spending mode. In doing some thinking on this I’m now at the paralysis by analysis stage. We have good problems to have. We want to spend ~6 months per year in the U.S. for the next 10 years. When it comes to needing U.S. dollars, what should we consider? How should be consider structuring our portfolio to assist with that? Thanks for your articles and I look forward to reading more on your site.
Made it (to retirement) Mary family goals for cash-flow and tax and risk:
- Net $30,000 CAD
- Net $20,000 USD
- maximize total return and minimize income tax like everyone else!
Made it (to retirement) Mary financial situation (late-50s):
- NET $22,000 from non-indexed defined benefit (DB) pension
- Gross $16,500 from Canadian dividends
- Balance needed for required income: TBD
Investments (in Canada):
- CAD Cash: $74,500
- USD Cash: $16,300
- Non-registered Canadian portfolio: $505,000
- RRSP/LIRA: $517,300
- TFSAs (x2): $129,400
Without knowing lots of information about goals, including estate plans, and for many other reasons – I can’t provide a concrete plan but here are my brief observations based on your questions:
When it comes to needing U.S. dollars, what should we consider?
How should be consider structuring our portfolio to assist with that?
In a taxable account, be wary of the tax hit on any U.S.-dollar savings or chequing accounts. My understanding is any foreign-currency gains (or losses) in excess of $200 in any tax year are reportable to CRA (Canada Revenue Agency). These reportables are null and void when money just sits in a U.S.-dollar account – it’s the trading back and forth you need to worry about. The capital gain (or loss) is triggered when you convert funds from a foreign currency into Canadian dollars or another foreign currency. You can visit/Google CRA for more details on this subject.
In a registered account, such as your TFSA, I think it could make sense to potentially leverage the U.S.-dollar side of your self-directed TFSA for some tax-free U.S. dollar withdrawals for your travel. You can consider owning Canadian inter-listed stocks that pay dividends in USD $$ or you can consider owning U.S.-listed ETFs or U.S. stocks inside that account. Just be mindful for the latter, for non-Canadian dividends including those paid by U.S. stocks or ETFs, those dividends are subject to 15% foreign withholding tax inside your TFSA – a subject I wrote about here.
In addition, I would consider these things as well with U.S. content in your TFSAs:
- any receipts or withdrawals for tax purposes will actually be in the Canadian dollar equivalent.
- any contributions you make will be recorded in Canadian dollars, so when keeping track of your TFSA contribution room, make sure you are working with Canadian amounts!
When it comes to our portfolio, I’ve started to consider the U.S.-dollar portion of our TFSAs to hold a bunch of U.S. cash and use it that money, tax-free, for winter vacations.
Regarding your RRSP, you can also consider owning U.S.-listed assets for foreign exposure and income but when it comes to RRSP withdrawals in USD $$, my understanding is, this is at the discretion of your financial institution. You might want to call around and ask since many brokerages will only allow withdrawals in Canadian money or if you want U.S. dollars you’ll need to make the withdrawals in Canadian funds and then convert to U.S. paying the bank’s spot rate.
Here are some other general observations and considerations:
- I have to start with this one – well done with the investing! Owning a $1 million-dollar portfolio is very impressive in your late-50s (excluding your pension). I hope we get there too!
- I would consider your non-indexed pension like a big-bond. This way, you can take more risks with investing in equities over time, taking advantage of rising markets over time while still meeting some basic income needs.
- I think you are very smart to keep a cash wedge of at least one year’s worth of retirement expenses – throughout retirement. Changes and emergencies happen. Cash is a buffer to help you in those times. I plan to do something similar here.
- Looking at your assets, although you may have other ideas, I would be deferring Canada Pension Plan (CPP) payments for a few years, at least until age 65.
- Related to #4, I would give some consideration to drawing down tax deferred money (inside the RRSP/LIRA) first, and moving any funds not needed for living expenses into the tax-free TFSA. This way, when it comes to accepting CPP and/or OAS income you could be in a better position tax-wise.
- In terms of “Balance needed for required income: TBD” have you considered the following?
- Draw down RRSP/LIRA in your 50s and 60s, while spending tax efficient Canadian dividends?
- Spend and draw down Canadian dividends in your 70s and 80s?
- What are your estate plans and do you really need to keep so much capital into your golden years?
Here is another great calculator to play with. I took some liberties, took the middle-age between 55 and 60, and showed you how much you could safely withdraw for about the next 15-20 years from your RRSP/LIRA; assuming you’re starting now (deferring CPP, OAS; not spending the capital of your Canadian dividend stocks, etc.). You’ll see you won’t run out of money for decades even with modest returns and inflation!
- I think preserving your TFSA capital, for the most part, could be a smart thing to do as you get older (i.e., into your 70s or beyond) since it can be part of your estate plans and/or all withdrawals from this account are not income-tested. Based on current TFSA rules, interest, dividends and capital gains (as you probably know) are not considered income; benefits and credits such OAS and the Guaranteed Income Supplement (should you ever need it) will not be reduced as a result of investment growth inside this account. Something to consider, drawing down all other accounts before spending the capital inside your TFSA(s).
- Have you considered owing a U.S. dollar account in the U.S.? That could have tax implications though. Here is a comprehensive RBC article on investing in the U.S. as a Canadian.
Our game plan:
Like I wrote above, you’re in great shape! Having a complex drawdown problem or some complex tax issues to navigate are EXCELLENT problems to have – all things considered – in retirement. It means you have enough money. 🙂
Now, for what it’s worth, here are other things we’re considering in our investing future for a comparable.
- We will continue to invest in our RRSPs. I will continue to own U.S. stocks and U.S. ETFs inside our RRSPs to diversify and, for a blend of dividend income and growth. We hope to have $500,000 invested (combined) inside our RRSPs, in addition to a small LIRA, between the ages 50-55 to start semi-retirement with.
- We intend to start drawing down our RRSPs in our 50s and 60s. Although our plans might change I could see us having $0 assets inside our RRSPs by age 70.
- We will continue to invest inside our TFSAs – striving to max out contributions to these accounts in the coming 5 years while working. We hope to have > $250,000 invested inside our TFSAs by age 50.
- I will continue to invest in Canadian dividend paying stocks in a non-registered account to take advantage of the Canadian dividend tax credit. We hope to have close to $300,000 invested in this account by age 50 or so. We will spend/live off the dividends earned from owning these Canadian stocks in the early years of semi-retirement. We figure $300k invested should yield close to $15,000 in tax efficient money for decades to come.
No doubt this post could go on, including sharing our situation but that’s what this blog is about anyhow! I hope this feedback provided you with some things to think about even if you make other decisions.
Readers – what do you make of Mary’s next steps? Retirees who are used to using U.S. dollars for various travel abroad what advice do you have for her? Share away in a comment below.
*Update* from Mary on July 25:
My Own Advisor disclaimer – the information posted on this site are the opinions of the author and should never be considered professional financial advice. I am an amateur investor. My Own Advisor is not a financial professional, tax expert, insurance guru or accounting whiz. Please consider consulting a financial professional before making any important investment decisions.