A physician we'll call Bob, 59, has a flourishing practice in Alberta. Together with his wife, who we'll call Marilyn, 54 - who works for his medical corporation - they bring home $22,500 a month. Through a combination of investments in real estate, a residence and financial assets, they have built $3-million in net worth. Their three children are adults, though one remains at home.
One would expect Bob and Marilyn to be financially worry free, but they are concerned that their assets may not carry them through retirement.
"Is our nest egg sufficient for us to retire in six years?" Marilyn asks. "If not, should we continue to contribute to our RRSPs?"
What the expert says
Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Bob and Marilyn. His analysis is revealing.
"Marilyn handles the family's finances," the planner explains. "She has managed them well, but she seems to be of the old school and holds her cards close to her. She has opened up for the planning process, but I think it has not been easy."
Bob and Marilyn should each receive maximum Canada Pension Plan benefits, currently $10,905 a year. Each will qualify for Old Age Security, though the clawback, which begins when taxable income hits $66,335, could take back much of the $6,204 annual payment. All figures are in 2009 dollars.
The family's assets and investment income will have to last for 30 years if Bob retires in six years when he is 65 and if Marilyn retires at the same time and lives to age 90. In that period, they will need $116,000 of gross annual income, Mr. Moran says. That would be sufficient to cover their current level of actual expenses with the elimination of savings, mortgage payments, registered retirement savings plan contributions and other disbursements associated with work, the planner estimates. Subtracting OAS and CPP, which should total $34,218 a year before the OAS clawback, they would therefore need only $81,782 a year of pretax investment income. The capital required to produce this income, assuming a 3-per-cent annual real return on assets and exhaustion of investment assets by age 90, would be would be $1.65-million, he adds.
They currently have investment capital far in excess of this requirement. Should money be given to the children or charities or retained for distribution at a later date, perhaps by the estate? If they begin a program of giving to family members or to good causes, taxes and the clawback would be less of a problem, Mr. Moran notes.
They have several strategic choices for their tax planning:
1. Each can continue to contribute to RRSPs at a current maximum rate of the lesser of 18 per cent of earned income or $21,000 for 2009 and $22,000 for 2010. Limits will be indexed thereafter to inflation rates.
2. They could set up an Individual Pension Plan, though they are costly to establish and operate. IPPs allow the corporations that sponsor them - Bob's medical company - to put in whatever is required to pay benefits promised by the IPP to the employee.
What's more, in contrast to RRSPs that can be victims of a bad stock market, IPPs require the sponsoring corporation to add money if plan assets fall below what is required to maintain benefits. The arrangements have to be validated by an independent actuarial review every three years. The company that maintains the IPP can show contributions to the IPP as a cost of business. One drawback to this plan is that the medical corporation's tax savings would be less than Bob's. IPPs require constant care and feeding, much like the big pension plans they resemble. In the end, it may not be worthwhile for Bob, Mr. Moran suggests.
3. They can make loans to their corporation. To date, the medical corporation has not retained any income. Bob and Marilyn have used after-tax dollars to pay for their real estate purchases and their non-registered investments. It would be useful to explore a transfer of their equity in financial assets to the medical corporation through a shareholder loan, he suggests.
The company would repay Bob with after-tax dollars equal to the amount he and Marilyn have lent the company. Return of capital would have no tax in comparison with taxable dividends from the corporation. Taxes on money generated by the loan would be deferred as long as Bob wishes.
4. They can plan a trust for distribution of income or assets to their children or to charities. At the death of the first spouse, the survivor will lose the ability to split pension income.
That failure to split will raise tax liability. The alternative is to have a testamentary trust ready to take over assets. The trust could invest and apportion capital for the survivor's needs with a view to tax savings and the interests of the couple's children and charities.
"The complexity of the couple's finances requires that any plan they choose be reviewed by their legal counsel, accountant and investment adviser," Mr. Moran says. "They can have a comfortable retirement. It is only a question of deciding what the goal of their work has been and then financing it tax efficiently."
The People: Physician and wife living in Alberta
The Problem: Substantial and complex assets make retirement planning difficult
The Plan: Design a retirement and estate plan for efficient asset management
The Payoff: Tax reduction and increased growth of net worth
After-tax monthly income: $22,500
Assets: Residence $550,000; B.C. condo $350,000; B.C. rental property $500,000; Toronto condo $350,000; Non-registered assets $400,000; RRSPs Bob $600,000; RRSPs Marilyn $450,000; Medical partnership value $80,000; Total: $3,280,000
Monthly disbursements: Mortgages $1,100; Line of credit int. $200; Food $700; Utilities, phones $700; Property tax home $400; Prop. tax. B.C. condo $200; Car maintenance $400;
Car insurance $100; Gas $150; House cleaner $600; Life insurance $400; Entertainment $1,000; Clothes $300; Grooming $200; Travel $2,000; Gifts and charity $2,000; RRSP: $3,000; Misc. $800; Savings $8,250; Total $22,500
Liabilities: Mortgage house $200,000; Line of credit $80,000; Total $280,000
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