A well-funded retirement

Transcription

1 A well-funded retirement Meet Charles and Gabriella Charles, 62, and Gabriella, 60, currently live in Montreal. Charles is a successful business executive, earning a base salary of $260,000 annually, plus generous bonuses. Gabriella has never worked outside the home. She concentrated on raising their children, and has an active social life. They have one daughter from Charles first marriage plus two children together. Hélène, 38, is married and has three young children of her own Michel, 25, is single, pursuing his Ph.D. and has substantial student loans Marie, 23, is a struggling single mother, and still shows a lack of maturity. She and her son, Jacques, 5, have been invited to live with her parents, provided she attends college at least part-time. Gabriella s father, 85, relies on her and her brother for assistance. Gabriella s brother, Pierre, has offered to let their father, Germain, live with his family. THE GOAL Charles and Gabriella want to have a comfortable retirement and help their family financially. Charles recently had a minor heart attack and, while he has made a very strong recovery, he has decided that it s time to retire to spend time with his family and to travel. Charles and Gabriella have said that they would like to: have enough income per year throughout retirement, that rises with inflation, to cover their basic expenses plus money for travel and other luxuries help fund their grandchildren s education help their children financially by providing income to Marie while she goes back to school, help Michel pay back student loans and transfer the cottage to daughter Hélène contribute financially for Gabriella s father s care minimize taxes throughout retirement and on their estate at death

2 Charles and Gabriella, financial situation Investments $600,000 in cash from the sale of their house $900,000 in Charles RRSP $400,000 in Gabriella s spousal RRSP $560,000 in Charles non-registered savings $200,000 in Gabriella s non-registered savings (gifted from her father) All investments currently invested 60 per cent equity, 40 per cent fixed income Assets House - $800,000 Cottage - $460,000 with adjusted cost basis of $50,000 No outstanding loans Income Charles is eligible for maximum Quebec Pension Plan benefits and will start them at age 65; Charles and Gabriella are both eligible for full Old Age Security benefits THE CHALLENGE How to meet the many needs of their blended family, plus Gabriella s father, and protect their retirement income from health care expenses. Charles and Gabriella are in the process of selling their home in Montreal valued at $1.4 million and moving to a smaller house in a smaller community, valued at $800,000. This move will allow them to be closer to Hélène and her family and to a community college where Marie can go to school. Charles and Gabriella need solutions that will give them: after-tax income of at least $80,000 per year throughout retirement, that rises with inflation, to cover their basic expenses additional funds as needed to travel funds for their grandchildren s education income of $15,000 per year for the next ten years to cover the costs related to having Marie and Jacques live with them; they also want to provide her with a monthly income to help teach her how to manage her own money money to help Michel with his student loans a way to protect themselves from the rising costs of health care Charles holds the title to the cottage that his late wife, Brigette, had inherited from her family 42 years ago. Although Charles and Gabriella have never made great use out of it, it is one of his daughter Hélène s only ties to her mother s family. Charles wants Hélène to receive title to the cottage. He also wants to ensure that any capital gains tax is taken care of.

3 THE SOLUTION A mix of pension, annuity and guaranteed minimum withdrawal benefit (GMWB) income, along with personal health insurance, can allow this couple to reach their goals. Charles and Gabriella are in the fortunate position of having enough money to live comfortably in retirement, while still being able to help their family. They need to look for ways to treat the children fairly, maximize income while minimizing tax, and protect themselves against health care risks. TIP There is likely not just one solution that is right for you. Everyone has unique retirement income needs and a combination of solutions will be needed to meet your goals. Charles and Gabriella decided to use $360,000 of the $600,000 from the sale of their Montreal home to meet their immediate objectives with the children: They can give $100,000 to Michel for his student debts and a small cushion. They can give the cottage to Hélène now and use $100,000 to help pay the resulting capital gains tax. This minimizes the tax bill and removes the property from Charles estate, where it would otherwise be subject to probate. Charles and Gabriella could leave their new house to Michel and Marie, upon their death, to balance Hélène s gift of the cottage. They can use $100,000 to buy a ten-year term certain annuity for Marie, which will give Marie $975 per month 1 in addition to the free room and board she already receives. $60,000 of the cash can be used to help with the education of their grandchildren, directing $45,000 to a family registered education savings plan (RESP) for Hélène s children and $15,000 to an individual RESP for Jacques. Gabriella should make the deposits to the RESPs over several years to maximize the available Canada Education Savings grants. The remaining $240,000 from the house proceeds could be used to create a cash wedge to fund their living expenses for the next three years by purchasing laddered GICs. They can replenish the cash wedge in the future with a combination of their remaining registered and non-registered assets. Charles and Gabriella could each use $250,000 from their RRSPs to buy segregated funds with GMWB with payments starting at age Single life term certain payout annuity on female born January 1, 1986, purchased on June 7, Quote run May 7, 2010.

4 If Charles qualified for life insurance, he could purchase a $500,000 minimum-funded universal life policy. He could then purchase a $500,000 prescribed life annuity which would provide a guaranteed annual income. While this strategy does not significantly affect the amount of his annual income compared to leaving the assets invested in the allocation described earlier, it eliminates the risk associated with those portfolio investments and provides another source of guaranteed lifetime income. Unfortunately, Charles advisor confirmed that, at this time, he cannot be considered for life insurance because of his recent heart attack, but could consider the insurance at a later date. In the interim, Charles decided to proceed with the life annuity to provide him with additional guaranteed income. Gabriella understands that while the average life expectancy of an 85-year-old male is age 90, about 30 per cent of these men survive to age 92 2 and beyond. Gabriella could probably meet her father s needs if she planned for a monthly expense of $1,000 for seven years, indexed for inflation. They could acquire personal health insurance (PHI) for themselves. They could also buy PHI coverage for Marie and Jacques for the next ten years. Charles and Gabriella could each transfer $10,000 into Tax-Free Savings Accounts (TFSAs) for use in emergencies. They can continue to shelter more of their non-registered investments from tax as their TFSA contribution room increases. ACTION plan What When Move to a smaller home Use the $600,000 cash proceeds from their house sale as follows: Give $100,000 to Michel to cover his loans Transfer cottage to Hélène and use $100,000 to pay the capital gains tax on transfer (give her any surplus if taxes are less than $100,000) Draft new will, leaving their new house to Michel and Marie Purchase a $100,000 ten-year term certain annuity for income for Marie Use $60,000 to contribute to RESPs for their four grandchildren Over the next few years Use remaining $240,000 for three-year cash wedge using GICs Over the next three years Use $250,000 from each of their RRSPs to buy GMWBs, with payments to start at age 72 Adjust asset allocation on remaining portfolio to 60 per cent equity, 20 per cent fixed income and 20 per cent cash equivalents to create an ongoing cash wedge Use $500,000 to purchase a life annuity to increase guaranteed income Charles, now Buy personal health insurance for Charles and Gabriella, and for Marie and Jacques Transfer $10,000 each from non-registered accounts to TFSAs for emergencies Consider applying for life insurance in the future, for life, for Charles and Gabriella, for ten years, for Marie and Jacques In a few years, Charles 2 Sun Life Financial life expectancy calculator.

5 THE RESULT Using the proceeds from the sale of their home gives them the funding to meet their many goals. The guaranteed sources of income, supplemented with withdrawals from savings, will provide them with the annual after-tax income of $80,000 they need to meet their basic expenses, indexed for inflation. It also allows them to meet their immediate goals of supporting their children, grandchildren and Gabriella s father, as well as protecting themselves from increasing medical costs. A look at how Charles and Gabriella will fund their retirement 3 $300,000 Government sources* $250, year term certain annuity income $200,000 RRIF minimum withdrawals (GMWB) $150,000 TFSA withdrawals Cash wedge $100,000 Registered withdrawals as needed $50,000 Life annuity Previous year s surplus Total needs *Includes Canada Pension Plan, Quebec Pension Plan and/or Old Age Security 3 SunWise Elite illustration run May 12, 2010 using the scenario historical model with a portfolio of 70 per cent equity and 30 per cent income. Income is fully taxable because GMWB is bought with registered funds. Historical market performance is not an indicator of future performance. Inflation assumption is three per cent.

6 Talk to your advisor today to see how retirement income solutions from Sun Life Financial can help you achieve your retirement goals or visit Advisor information: Life s brighter under the sun Sun Life Assurance Company of Canada,