More Canadians than ever are living well into their 80s and 90s. Is your retirement nest egg built to last that long? Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to discuss the importance of having a decumulation strategy so you can spend your savings in retirement with confidence.
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* Welcome back. More and more people are living well into their 80s and even their 90s, and that's raising questions about whether their savings can keep up. Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins me now with some ideas to help you enjoy your hard-earned money without having it run out and some examples.
- Nicole, always great to have you with us. I'm going to jump right in. What are the risks to having people's money run out?
* We have market volatility, inflation, taxes, overspending, health care costs. Perhaps we're funding our children's care or even their children. Maybe our parents are living longer, as well, and we're also funding them. We could be having financial abuse, being vulnerable to that. So there's a lot of different potential ways that we have calls on our money in retirement, both positive and potentially negative.
* We have talked about decumulation. And I want us just to remind people what this means, and also I'd say even strategic decumulation -- really being thoughtful about how we get into those savings.
* That's exactly right. It's the mindful management and spending of our retirement assets that allows us to fund our retirement using the money that we've saved. And we do this strategically. We want to ensure that we're maximizing those resources to have them go as far as possible.
- So that might include some income splitting ideas, making sure that when we're claiming our Canada Pension Plan or Old Age Security, that we're doing that thoughtfully, and really, the order that we're pulling our money out, the difference that can make to our bottom line. So doing it mindfully with a purpose to what you are spending for and ensuring that lasts as long as possible, so that you can fund your retirement as long as possible.
* What kind of things do you need to think about when they're factoring in or what things do you need to factor into that decumulation strategy when you're doing it?
* Well, of course, what your goals are, what you are funding, your assets, your income, perhaps your health care needs, both current and future, the longevity, how long you expect to live based on your family history. We might have some foreign tax obligations. We might have goals for our estate plan. So a lot of different factors to weigh and potentially some tradeoffs to make, as well.
* All right, let's get into the numbers. We've got a bit of time here. We can dig into them. So we're saying for this scenario that someone is retiring at 65. They've got $250,000 in retirement savings. $200,000 of this money is in a non-registered account and $50,000 is in a TFSA. So take us through what this looks like if they had to save for 10 years, for 20 years, for 30 years, or even 35 years.
* Well, I'll caveat this by saying the assumptions that we make here are really important. It really drives the math behind this. So when we say that we have $200,000 in a non-registered account, of course, that means that the income in that account is subject to tax, and when you draw it out, it's subject to tax.
- We have $50,000 in a TFSA that is not going to be subject to tax and that we can draw out tax-free. And the order in which we do that is going to be important, as well. Assuming a rate of inflation of 2% and a 5% return on those investments, we can look at, and say an average tax rate of 25%, over 10 years, you would be able to spend $28,335 a year, indexed annually, before you're running out of money.
- 20 years, that's going to be reduced to $15,545. 30 years, we're down to $11,338 per year. And at 35 years, that same $250,000 nest egg is going to only allow you to be spending just over $10,000 a year. Now, that doesn't include any private pensions that you might have or your CPP or your OAS entitlement, but it does show you that your longevity, how long you are spending in retirement, has a major, major factor in how much you can be spending in each of those years.
* And also, and we've talked about this before, but what you spend in your early years of retirement will probably be quite different than what you spend later, up and down for many different reasons. But when you're thinking about what you need versus maybe what you have, what are some ways to help you close that funding gap so that you can get to what you need?
* Well, of course, boosting any savings that you can. So before you're into retirement, making sure that you're saving as much as possible and prioritizing that saving. And then investing that in the most tax effective way possible because as we just discussed, with that example, if you were to have that same $250,000 completely in an RRSP, or a RRIF, or if it was in a TFSA, your tax situation is going to be much preferred than if it was in a non-registered account. So that tax efficiency of your savings is important.
- And then planning for the unexpected, as well, of a death of a spouse or not really counting on the inheritance that you might be receiving from your parents, making sure that you're factoring that in. Perhaps you might be retiring later. Perhaps we're looking at what our house could provide for us if we're fortunate to have one.
- Are we leveraging that? Are we either selling it to downsize? Perhaps we are renting out a portion of that or maybe we're liquidating it to fund our retirement, as well. Lots of different things we can be thinking about, including potentially working part time in retirement and receiving additional income beyond what we would have already been saving for during our saving years.
* Amazing insights, Nicole. And we'll let everyone know, too, one of the best ways to do this is model it out. Work with a planner, work with an advisor to figure out what works. We're against the clock, Nicole. Thanks so much.
* My pleasure, Kim.
[MUSIC PLAYING]
- Nicole, always great to have you with us. I'm going to jump right in. What are the risks to having people's money run out?
* We have market volatility, inflation, taxes, overspending, health care costs. Perhaps we're funding our children's care or even their children. Maybe our parents are living longer, as well, and we're also funding them. We could be having financial abuse, being vulnerable to that. So there's a lot of different potential ways that we have calls on our money in retirement, both positive and potentially negative.
* We have talked about decumulation. And I want us just to remind people what this means, and also I'd say even strategic decumulation -- really being thoughtful about how we get into those savings.
* That's exactly right. It's the mindful management and spending of our retirement assets that allows us to fund our retirement using the money that we've saved. And we do this strategically. We want to ensure that we're maximizing those resources to have them go as far as possible.
- So that might include some income splitting ideas, making sure that when we're claiming our Canada Pension Plan or Old Age Security, that we're doing that thoughtfully, and really, the order that we're pulling our money out, the difference that can make to our bottom line. So doing it mindfully with a purpose to what you are spending for and ensuring that lasts as long as possible, so that you can fund your retirement as long as possible.
* What kind of things do you need to think about when they're factoring in or what things do you need to factor into that decumulation strategy when you're doing it?
* Well, of course, what your goals are, what you are funding, your assets, your income, perhaps your health care needs, both current and future, the longevity, how long you expect to live based on your family history. We might have some foreign tax obligations. We might have goals for our estate plan. So a lot of different factors to weigh and potentially some tradeoffs to make, as well.
* All right, let's get into the numbers. We've got a bit of time here. We can dig into them. So we're saying for this scenario that someone is retiring at 65. They've got $250,000 in retirement savings. $200,000 of this money is in a non-registered account and $50,000 is in a TFSA. So take us through what this looks like if they had to save for 10 years, for 20 years, for 30 years, or even 35 years.
* Well, I'll caveat this by saying the assumptions that we make here are really important. It really drives the math behind this. So when we say that we have $200,000 in a non-registered account, of course, that means that the income in that account is subject to tax, and when you draw it out, it's subject to tax.
- We have $50,000 in a TFSA that is not going to be subject to tax and that we can draw out tax-free. And the order in which we do that is going to be important, as well. Assuming a rate of inflation of 2% and a 5% return on those investments, we can look at, and say an average tax rate of 25%, over 10 years, you would be able to spend $28,335 a year, indexed annually, before you're running out of money.
- 20 years, that's going to be reduced to $15,545. 30 years, we're down to $11,338 per year. And at 35 years, that same $250,000 nest egg is going to only allow you to be spending just over $10,000 a year. Now, that doesn't include any private pensions that you might have or your CPP or your OAS entitlement, but it does show you that your longevity, how long you are spending in retirement, has a major, major factor in how much you can be spending in each of those years.
* And also, and we've talked about this before, but what you spend in your early years of retirement will probably be quite different than what you spend later, up and down for many different reasons. But when you're thinking about what you need versus maybe what you have, what are some ways to help you close that funding gap so that you can get to what you need?
* Well, of course, boosting any savings that you can. So before you're into retirement, making sure that you're saving as much as possible and prioritizing that saving. And then investing that in the most tax effective way possible because as we just discussed, with that example, if you were to have that same $250,000 completely in an RRSP, or a RRIF, or if it was in a TFSA, your tax situation is going to be much preferred than if it was in a non-registered account. So that tax efficiency of your savings is important.
- And then planning for the unexpected, as well, of a death of a spouse or not really counting on the inheritance that you might be receiving from your parents, making sure that you're factoring that in. Perhaps you might be retiring later. Perhaps we're looking at what our house could provide for us if we're fortunate to have one.
- Are we leveraging that? Are we either selling it to downsize? Perhaps we are renting out a portion of that or maybe we're liquidating it to fund our retirement, as well. Lots of different things we can be thinking about, including potentially working part time in retirement and receiving additional income beyond what we would have already been saving for during our saving years.
* Amazing insights, Nicole. And we'll let everyone know, too, one of the best ways to do this is model it out. Work with a planner, work with an advisor to figure out what works. We're against the clock, Nicole. Thanks so much.
* My pleasure, Kim.
[MUSIC PLAYING]