Preserving Wealth – Getting Retirement Income Planning Right

At Cashflows & Portfolios, we’re passionate about preserving wealth, and getting retirement income planning right. That includes being tax efficient as part of our own retirement drawdown plans and helping Canadians with that too.

In recent months, we’ve published several important articles for anyone nearing retirement, thinking about early retirement and generally speaking, wanting to get their own retirement income plans organized and managed for the better.

Some examples:

• We debunked the 4% rule for early retirees since while we feel it’s a nice starting point, we shared why we won’t follow that rule ourselves.
• For any retiree, we believe you should be wary of the financial industry and any new products. This is one example: the Longevity Pension Fund.
• There are some general truths about retirement income planning here.

As financial bloggers with a combined 25+ years of experience in supporting Canadians, we’ve been very fortunate to work with some great folks in the financial industry, who also share our passion for Do-It-Yourself (DIY) investing, early retirement income planning, and much more.

We know that planning for any retirement, early or at a more traditional age, should actually begin a few years in advance.

Why?

Well, too little retirement income or planning for retirement may mean your basic needs and some wants could be in jeopardy.  On the flip side, a large estate (lots of money hoarded), while it sounds great may not be desirable either.

Our site was designed to answer cash flow management, retirement income planning and preserving wealth questions like:

• How long will my assets last?
• What accounts should I draw down first?
• Did I save enough money to meet my income needs and wants?
• When should I take government benefits like CPP and OAS to support my retirement income?
• How can I be tax efficient with my investments?
• Should I carry debt into retirement?
• And much more!

We’ve answered those questions and more on our site for a few clients, and no doubt we’ll answer many more for others.

• When should you take Canada Pension Plan (CPP) in retirement?
• Can you carry a mortgage into retirement? 

Preserving Wealth Book and Interview with the Author

For today’s post, we want to welcome to the site Jack Lumsden, MBA, CFP^®, who is a financial advisor at Assante Financial Management Ltd. with over twenty years of experience and author of Preserving Wealth – The Next Generation: The Definitive Guide to Protecting, Investing, and Transferring Wealth.

Jack Lumsden and ourselves discussed a range of retirement drawdown subjects below – topics that we believe are important to many Canadians.

Jack was also kind enough to offer up a few copies of Preserving Wealth – The Next Generation to giveaway. Before that though, check out our interview!

Jack, welcome to the Cashflows & Portfolios site. You’re our first guest interview and book giveaway!

Thanks for having me guys. It’s a pleasure.

Jack, tell readers about yourself. 

Sure, Mark and Joe.

I’ve been very fortunate to work as a Financial Advisor and CERTIFIED FINANCIAL PLANNER professional with Assante Financial Management Ltd. who’s had client’s interests at heart for over twenty years now. Beyond helping clients preserve and transfer their wealth over the years, I’ve also helped clients who are or will be making the transition from their working years to retirement, with the need to develop a lifelong income and cash flow strategy from the financial assets they have accumulated.

Your site seems very well designed towards cash flow management – which is great. As you well know (since one of you is now in your asset decumulation years), asset drawdowns for even early retirees can be a daunting challenge for many but with the correct support, it is totally achievable.

I live in Burlington, Ontario and beyond the client work, I also dedicate much of my spare time to staying active and coaching high school football among other interests. I thoroughly enjoy attending sports events with my son Connor and watching country music concerts with my daughter Paige. I also enjoy travelling with my wife, Sandi, and with friends to explore new destinations when we can!

Awesome. So, leading up to this interview we learned that Preserving Wealth has been around for some time actually. The original version was written over 20 years ago. What have you learned about investing during that time that has helped you personally, in your own life?

Mark and Joe, the most important lesson I have learned is you really need to focus on the basics. The same basics from 20 years ago are the ones that lead to long term success such as:

• Spend less than you earn
• Set up a monthly investment plan
• Invest using a globally diversified portfolio
• Pay down debt
• Take advantage of RRSP, TFSAs, RESPs
• Develop cash reserves
• Don’t try to time the market
• Take the time to develop a strategy and plan
• Educate yourself (like your web site does!)
• Compounding works!

It is not exciting, but applying the basics works.

It’s like coaching football. You must work on the basics of blocking and tackling every practice, and the team that can block and tackle better usually wins.

From an industry standpoint, I think over the last 20 years the financial advice industry has become more professional, and this has led to greater transparency for investors.

In addition, the aging population and longer lifespans have created a greater focus on decumulation strategies, although more work needs to be done.

At Cashflows & Portfolios, we agree and why we have the site.  Jack, we have touted the merits of using the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) as much as possible – as wealth-building tools. Here are some of those articles:

• Everything you need to know about the TFSA and TFSA contribution limit.
• Everything you need to know about the RRSP and RRSP contribution deadline.

Before we get into asset drawdown ideas, what are your thoughts on leveraging those accounts to build wealth? Have you used those accounts yourself?

I agree with you in that RRSPs and TFSAs are great wealth-building tools for families.

RRSPs are a great way to build wealth by:

• Tax savings on the current income, and then,
• The tax-free compounding growth of investments within the RRSPs over time, such that,
• The potential to pay lower income tax on the RRSP withdrawals in the future, and/or the ability to control when you bring those withdrawals into an income stream.

TFSAs have been a great addition to an investors’ toolkit, and they are a great tool to build wealth tax-free but this account and the assets within it can also be used as an estate tool to pass assets tax-free to the next generation.

A simple strategy many people miss while working is to invest the tax savings from their RRSP contributions into their TFSA each year.

One item we do come across is a lot of people only use savings or high interest savings accounts in their TFSA. Given the low interest rate environment, for many people it may make more sense to invest inside the TFSA, for longer term gains, using some equity-based investments to take advantage of the tax-free compounding.

In our personal lives we take advantage of RRSPs, and these have both been maximized. We also have TFSAs, focusing on long-term growth.

As well we used Registered Education Saving Plans (RESPs) for our kids as they grew up.

With one founder of Cashflows & Portfolios being an early retiree and the other one almost there, we have seen all sorts of approaches when it comes to asset decumulation. Why is this such a puzzle? Can you speak to the asset drawdown complexity you see and help clients with?

One of the most important decisions a retiree must make is how to create an income and cash flow strategy from the financial assets they have accumulated over their lifetime.

The reason is, as you well know, it is a puzzle. A retiree may have numerous sources of potential cash flow. As an example, a couple who recently retired had 15 sources of income amongst the following sources:

• Old Age Security (OAS)
• Canada Pension Plan (CPP)
• Company pension plan
• RRSPs, LIRA, S-RRSP
• Tax free savings accounts (TFSAs)
• Guaranteed income products
• Non-registered investment accounts

Each of the above cash-flow sources can have different start dates and we had to review and model when to start those 15 sources of income or cash flow. Another complicating factor is each source of income is taxed differently, and this must be taken into consideration. The process we developed to create tax efficient income and cash flow over retirement is as follows:

Step 1 – review your cash flow sources and start dates.

Step 2 – create an order of withdrawal or account sequencing strategy.

Step 3 – create an asset location and deployment strategy.

Step 4 – test the results.

Step 5 – make annual adjustments.

In this example, since these were younger retirees, the initial goal was to put as little stress on their own assets as possible, so the RRSPs are still being deferred to a later date. (I know this is something you write about as well.) For your readers, the reason for the deferral is they would have to redeem more income from an RRSP/RRIF than a non-registered account to create the same after-tax income, increasing their initial withdrawal rate.

Over time, this most likely will be adjusted to pay a bit more tax today to create a larger estate for the next generation. That is their plan.

A key point though, not only is the initial strategy important, but making annual adjustments are even more critical to keep people on track to maximize their retirement income and cash flow with the inevitable changes in families’ lives over 30 years (or 40 years in your case) of retirement.

Well put.  Based on what you shared above Jack, are there any rules of thumb that might apply to asset decumulation? This includes when to drawdown the taxable account, TFSA or RRSP in what order? What about taking CPP or OAS? Any rules of thumb there or client experiences you can speak to?

Our planning process first starts with “do you have enough?” and the drawdown strategy we use for the initial run through is the following order:

• Non-Registered Investments, TFSAs, and RRSPs last.

Once we know there is enough, then we can start the income planning process.

For reviewing decumulation options, it can come down to balancing short- and long-term tax efficiency as follows:

• Maximize your current income or cash flow today, or
• Maximize your terminal wealth (estate value).

Everyone’s plan is different with these two bullets as you also know.

The typical drawdown order we compare are:

• Non-Registered Investments, TFSAs, and RRSPs
• Non-Registered Investments, RRSPs and TFSAs
• RRSPs, Non-Registered Investments, TFSAs
• Blended withdrawals – equal from each
• Custom withdrawals based on tax bracket management. This often includes partial RRSP conversions and using TFSAs as a long-term and/or estate asset.

We can compare the current tax, the marginal tax rates over the years, and the estate value for each option.

As a rule of thumb, often we see with younger retirees their goal is to maximize their current cashflow and preserve their own assets as long as possible. So, for an early retiree a typical drawdown order might be:

• Non-registered investments, RRSPs next, then TFSAs last.
• Depending on the tax rate, partial conversion of RRSPs may be done.

The key advantages of deferring the conversion of your registered investments to income is, it puts less stress on your own investments in the first several years of retirement, and this will help to preserve your own assets longer.

As retirees age, often they can then look at a RRIF exit plan to reduce the amount of tax on the death of the last spouse/CLP (common law partner). Essentially, with a RRIF exit plan you would take out more income than required, and the presumption is the additional tax each year would be less than the tax to the estate on the death of the last spouse/CLP.  Any extra income could be used to top up your TFSAs each year – as part of wealth transfer in a tax-efficient way.

Many retirees will end up with a custom strategy based on tax bracket management over time, such as partial conversion of RRSPs to RRIFs prior to age 71.

Lastly, let’s talk about CPP and OAS.

There has been much written about when to take CPP over the last several years. With people living longer, for some people delaying CPP can be a great benefit for one or both spouses/CLP’s if you have enough assets to fund the bridge period.  This can be considered sort of longevity insurance. For couples, a strategy to review is for the older spouse/CLP to take CPP at retirement, and the younger spouse/CLP to delay.

With OAS, given there is no survivor pension for OAS, for many people it makes sense to take it at age 65—assuming you are not in the OAS recovery tax zone (i.e., OAS clawback zone). Fortunately, with our financial planning software we can compare the various drawdown orders and sequencing to see the effect on:

• taxes over time
• spending levels
• estate value on an annual basis
• stress test of each option.

I’ll link to a few extra reading sources for your readers.

Jack on tax strategies and retiree income splitting.

Jack on “if you are within 5 years of retirement do this now”!

As passionate personal finance and investing guys, we thought Preserving Wealth really shed some light on the taxation issues that surround any wealth transfer or estate planning in general. Can you speak to these two topics and what people can read about in your book?

Happy to Mark and Joe.

The key item with wealth transfer or estate planning is to start with the end in mind, that is, “What do you wish to happen?”

Once you decide on the end goal, such as leaving money to your kids, grandchildren, or charity, you can then begin to formulate the appropriate tax and estate cost reducing strategies.

The book will review high-level strategies that families may need to consider to create an effective estate plan to reduce estate costs and taxes as they transfer wealth to the next generation. A key element of this is communication within your family.

The book discusses the four essential family conversations families should have here.

My hope is that by reading the book, it will lead families to review their current plans and seek to either educate themselves or reach out to their advisors.

Tax and estate planning is not a set it and forget it plan, it should be reviewed as your family life and tax rules change over time.

One item we see again and again is people use various strategies (i.e., parents who put their home in joint ownership with their children) in an attempt to avoid probate fees, without regard for unintended circumstances. The entire estate plan must be considered and not just the individual elements.

Jack on why Probate may be a good thing!

Lastly Jack, as a financial professional, that works with clients every day, what do you believe are the 2-3 things all Canadians need to consider when it comes to preserving wealth or handling their estate?

If I had to pick just three, the top three things would be:

1. Make sure your estate documents are current and review your beneficiary designations.
2. Engage in the ongoing financial planning process.
3. Create an “Elder Care” Plan.

Here are some more reading resources for your readers:

Have a plan for a retirement home.

Avoid this mistake – check your beneficiary designations. 

What is Elder Care? Have you had “the discussion”?

Thanks very much for your time Jack and now…

Preserving Wealth Book Giveaway!

Readers, Jack Lumsden is pleased to offer one (1) free hardcopy of Preserving Wealth and a whopping five (5) e-copies for a total of six (6) giveaways to six lucky Cashflows & Portfolios readers!

Use the entries below to enter the giveaway and we’ll draw six lucky names at random in a few weeks.

For the winning names, Jack will be happy to mail you the hardcopy version of his book and any ebook winners will be sent a link from Jack, to download Preserving Wealth for free for a limited time. You can then read it on your favourite PC device.

Good luck to all entrants!!

a Rafflecopter giveaway

Do you want to know if you have enough to retire?  Or when you can retire with your desired lifestyle?

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