This retired woman needs to figure out what to do with potential $50 million in savings

Marianna wants some guidance on how to enjoy a comfortable retirement without risking outliving her money

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Research shows that one in five women in Canada will remain childless, which dovetails with census data that shows more people are living alone, as part of a couple without children or as part of a multi-generational family.

Marianna*, 50, is among this growing shift away from the traditional nuclear family. She is single, has no dependants and lives with her parents, who are in their 80s, in a home they jointly own and which she will inherit. She is also already enjoying retirement.

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After building a near-30-year career as a music teacher, she retired from her full-time job four years ago, at which point, she commuted her employer group retirement savings plan and invested those funds into a self-directed registered retirement savings plan (RRSP), which is made up of dividend-paying Canadian equities, largely in the bank and energy sector.

The plan is now worth $1.5 million and generates annual dividends of nearly $79,000. Initially, she reinvested the dividends into the RRSP. Two years ago, she began drawing funds from the RRSP to avoid a hefty tax bill down the road. She is now using that money to pay her yearly tax bill, but isn’t sure that’s the right approach.

Marianna has an additional $2.5 million (including $113,000 in a tax-free savings account), also fully invested in the same dividend-paying Canadian stocks. Her portfolio generates nearly $155,000 each year, which she reinvests each year into her portfolio.

Her taxable income now is $329,000, including $155,000 in dividends (considered $214,000 in taxable income after gross-up), $79,000 in RRSP withdrawals and $36,000 in income from a part-time job teaching music. This money easily covers her expenses of about $3,000 a month and she has no debt. A lifelong musician, she has no plans to fully retire. She loves to travel and typically takes at least one trip a year, which costs about $5,000.

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Marianna wants to know if she is making the right decision to draw from her RRSP now or should she let it grow until she’s required to draw down funds at age 72, at which point it will be worth $9 million. Letting it snowball could lead to a massive tax bill. Or should she be drawing down even more money (an additional $40,000 a year) now to slowly wind it down over the next 40 years?

Marianna would also like to know when she should start collecting Canada Pension Plan (CPP) and Old Age Security (OAS) payments to ensure she pays minimum tax and avoids any clawback.

Ultimately, she wants to make sure she is on the right track for a comfortable retirement and that she does not outlive her money.

What the experts say

Both Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, and Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management in Vancouver, said Marianna is in an enviable financial position and has more than enough money to see her through the next 40-plus years.

If she continues on her current savings path, she could have $50 million at age 92, according to Rempel’s calculations.

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“What does she want to do with all this money? Her three main options are: spend more, give to family or friends, or donate to charities,” he said. “She seems quite happy with her current lifestyle. She can afford to spend $400,000 per year before tax, or about $270,000 per year after tax. That is more than $200,000 per year after tax more than she is spending.”

Egan agrees with Marianna’s decision to start drawing down funds from her RRSP now versus waiting until age 72 to transition into a RRIF.

What does she want to do with all this money?

“She should have a financial planner run some projections/scenarios to calculate the amount she could withdraw, including her RRSP dividends, so that her RRSP is close to zero at age 95. This will allow her to avoid a large tax bill on her RRSP and enjoy her savings sooner,” he said. “Any annual surplus cash from the RRSP drawdown strategy can be contributed to her TFSA within contribution limits, and then added to her non-RRSP portfolio.”

Egan also thinks Marianna should consider lessening the overall risk of her portfolio, which is 100 per cent in equities.

“She doesn’t need to be this aggressive,” he said. “Bond ETFs pay regular income and typically are less volatile than stocks.”

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Rempel sees no tax advantage to drawing RRSP income now versus later because Marianna is already in the highest tax bracket.

“She is paying 54 per cent tax on the $79,000 a year she withdraws from her RRSPs to pay her income tax, which in effect means she is prepaying the tax she wants to avoid paying years from now,” he said. “It’s smarter to defer tax as long as possible.”

Rempel’s advice: Invest more tax efficiently in global or U.S. equities focused on deferred capital gains.

“Going this route, her taxable income on investments plus work should be about $60,000 a year, instead of $329,000 today. This would almost all be taxed at the lowest 20-per-cent tax rate, which would bring her tax bill down to about $13,000 a year,” he said. “She could sell non-registered investments to pay her income tax and not touch her RRSP until age 64. At that point, she can withdraw as much as she can with a taxable income below $100,000, which is about $40,000 a year.”

Another option is to leave the RRSP until age 71, at which point her annual tax bill will be about $41,000, which she could pay with dividend income.

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Given her current income and tax situation, Egan recommends she delay both CPP and OAS as long as she can, which is age 70 for both payments.

“Regardless of when she takes them, her CPP entitlement is not going to make a big financial difference and her OAS will likely be partially or completely clawed back,” he said.

But Rempel thinks she should start CPP at 60 and OAS at 65.

“She invests 100 per cent in equities, so her investments should have a higher return over time than the implied return of five per cent per year from deferring CPP and OAS,” he said.

* Names have been changed to protect privacy.

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