By Julie Cazzin with Allan Norman

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

FP Answers: What's the best way to draw down our assets in retirement if we don’t want to leave a large inheritance? Back to video

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

Play Video

Q: My wife Andrea, 56, and I, 60, have enough resources to retire and be financially secure through any reasonable life expectancy, but we are seeking some advice on asset de-accumulation and which types of investments and assets to melt down — and in what order and when — all with an eye to doing so in a tax-efficient way. We want to model our spending using the retirement philosophy: the Go-Go phase (ages 55 to 69, when people are more physically and mentally active); the Slow-Go phase (ages 70 to 85, when retirees generally slow down); and the No-Go phase (when age plays a big role in slowing down mental and physical activities and some level of care/support is needed). We roughly projected that we would spend $115,000 annually until I am 74 years old, then $90,000 annually until I am 80 and then $70,000 annually after that. We don’t want to leave a big estate.

Our assets include a $950,000 home, which we plan to sell within five years when we move into our second home, worth $400,000. We also have $1.3 million in a non-registered account, $230,000 in tax-free savings accounts (TFSAs), $1.36 million in a registered retirement savings plan (RRSP) and $875,000 in a holding company. As well, my wife has an indexed pension of $66,000 annually, dropping to $52,000 at age 65. — John

FP Answers: Seeking and receiving financial advice before knowing your future lifetime spending pattern can lead to inappropriate advice. Of course, it’s almost impossible to predict future spending, which makes retirement planning more akin to project management, meaning you are constantly dealing with change.

This is why I am not a big fan of goals-based planning. Goals are hard to identify and often change. A better way is to focus on the one thing everyone wants and the one motivational fact about money you can’t deny.

What does everyone want? Lifestyle. You, like everyone else, have a lifestyle, and I’m sure it’s one you want to maintain and enhance. Nobody wants to go backwards, and this is what real financial planning is all about: maintaining and enhancing your lifestyle.

Start identifying your lifestyle by preparing your cash-flow statement. It shows where you are spending your money, as well as how much you are spending, and this reflects your lifestyle. Knowing the cost of your lifestyle provides the starting point to run financial projections to show if you have more than enough money, not enough or just enough.

With that in hand, consider the one motivating fact about money you can’t deny: you only have so much time to use it before your health or life is gone. So, make today, this month and this year a good one. Stringing together a series of good years leads to a rich life, full of memories and experiences.

Modelling your situation shows you can be enjoying an additional $135,000 per year after tax, on top of the $115,000 per year you have told me you want to spend. What could you do with an extra $135,000? And imagine my advice if I accept your retirement income guess of $115,000 per year.

At $115,000, you don’t have to draw any money from your holding company, so here is an idea: purchase a corporately owned life insurance policy. Insurance is often suggested to deal with double taxation, something an accountant can minimize or eliminate, and to get money out of the corporation tax free upon your death. Double taxation occurs when company shares are deemed sold at a similar time that corporate investments are sold.

The insurance idea might be good if you restrict your annual spending to $115,000, but what if you accept my suggestion and start spending an additional $135,000 per year, leaving a smaller estate of $600,000? I’m not sure insurance is still a good idea.

Instead, my modelling shows you are best to leave your tax shelters, TFSAs and RRSP intact, and draw a combination of dividends from your holding company and non-registered accounts first. Using this as a guide, you should really work with your planner or accountant each year to determine the most tax-efficient withdrawal for that year, particularly with a holding company.

From your holding company, different types of dividends will become available to you at different times. There will be tax-free dividends from the capital dividend account (CDA), as well as eligible taxable dividends and non-eligible dividends.

Confirm with your accountant each year the amount available to you and decide which type of dividend should be paid. If there is a positive CDA balance, be cautious of selling corporate investments at a loss before paying out a CDA dividend, as the loss will reduce the amount of money that can be paid out tax free from your corporation.

As for your Old Age Security (OAS), what do you want to do? Maximize your family’s memories and experiences using your money? Or reduce your spending to collect some OAS and increase your estate?

John and Andrea, you have more than enough money to live a great retirement. My suggestion is to seek out a financial planner who can help you identify your lifestyle and show you what is possible. From there, really think about what you want to do and how you want to use your money. Remember, life is not a rehearsal.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. Allan can be reached at alnorman@atlantisfinancial.ca.