Analyze the client’s retirement situation by assessing the following factors:
1. After-Tax Income
Determine the couple’s annual after-tax income requirement:
- Assess the level of fixed employer and government pensions (before tax)
- Assess the level of the before-tax income requirement (if greater than $80,000, more complex)
2. Tax Brackets
Determine each spouse’s current tax bracket and future tax bracket based on fixed pension income (DBPP, CPP, OAS, RRIF, and LIF/LRIF minimum withdrawals)
3. Registered Assets and Non-registered Investment Assets
Determine the total dollar value of each spouse’s registered assets (including commuted value of DBPP) and non-registered investment assets:
- Determine the couples income/asset ratio (excluding fixed pension income)
- Calculate the dollar value of each spouse’s registered assets relative to non-registered assets
- Project future RRIF and LIFILRIF minimum withdrawals to assess future tax bracket
- Identify additional assets that can be used to provide retirement income (e.g., sale of cottage, use of universal life (UL) insurance policy, business assets, etc.)
4. Strategic Asset Allocation and Portfolio Tax Efficiency
Assess the strategic asset allocation of the couples joint, integrated investment portfolio and ensure the tax efficiency of non-registered investment assets
5. Estate Planning Goals
Determine the couple’s estate planning goals:
- Assess the sufficiency of retirement assets for the surviving spouse
- Determine if there is a requirement for a fixed estate (specific amounts for bequests)
B. CASH FLOW MANAGEMENT, INVESTMENT PLANNING, AND TAX PLANNING
Develop an optimized cash flow projection and detailed investment plan. The optimal draw down of retirement income options is an iterative process and includes tax deferral and income-splitting strategies.
Cash Flow Management
Annual Cash Flow Projections
Assess the timing and amount of current and future monthly, quarterly, and annual cash inflows and outflows (in nominal dollars):
- Project cash flow for 1 year (detailed)
- Project cash flow for 5 to 10 years (including first few RRIF and/or LIFILRIF draw downs)
Pro-forma Tax Returns
Assess annual after-tax retirement income for 5-to lO-year period above:
- Determine each spouse’s average tax rate (ATR), the couples ATR, and potential changes in the ATR
- Determine each spouses marginal tax rate (MTR) and potential changes to the MTR
- Assess tax strategies to maximize after-tax income and minimize risk of outliving assets
Determine the optimal timing to receive an employer pension and CPP:
- Assess deferral options if significant pension income
Tax Bracket for Each Spouse
Assess the optimal draw down of registered assets and non-registered assets based on each spouse’s current tax bracket and future tax bracket:
- Determine the present value of after-tax income and future taxes over the entire retirement period
Sequence for Optimal Draw Down of Assets
Analyze whether the following “conventional” sequence provides the optimal draw down strategy for registered assets and non-registered assets:
- Higher-income spouse’s non-registered assets
- Lower-income spouses non-registered assets
- Lower-income spouses registered assets
- Higher-income spouse’s registered assets
Tax-Efficient Investment Portfolio
Develop a strategic asset allocation for the couple’s
joint, integrated investment portfolio and focus on the tax efficiency of non-registered investment assets:
- Growth: Hold non-registered equities/equity funds for long-term growth and tax deferral
- Income: Set up a systematic withdrawal plan (SWP) on equity funds and/or invest in preferred shares/dividend funds if income is required from nonregistered assets
At Death of First Spouse
Implement tax deferral strategies at the death
of first spouse:
- Use the deceased spouse’s unused RRSP contribution room (spousal contribution)
- Offset the deceased spouses capital losses against any capital gains
- Roll over the deceased spouses assets to the
- surviving spouse at the adjusted cost base (ACB)
Income-Splitting Strategies
CPP Retirement Benefit
Split CPP benefits, especially if spouses are in different tax brackets
RRIF, LlF/LRIF Setup
Base the RRIF and LIFILRIF (provincial rules may differ) on the younger spouses age and assess the optimal RRIF and LIF/LRIF draw down strategy for maximum flexibility
Lower-Income Spouse’s Registered
and Non-registered Investment Assets
Assess the following strategies in order to build up the lower-income spouses investment assets (assess all tax issues):
- Draw down first on the higher-income spouse’s non-registered assets to meet expenses and invest the lower-income spouse’s income to increase non-registered investment assets
- Invest the lower-income spouse’s RRSPIRRIF assets and non-registered assets in aggressive equities to increase assets in order to try and equalize retirement income and minimize taxes
- Sell the lower-income spouse’s non-income producing assets to the higher-income spouse at the fair market value to provide the lower-income spouse with non-registered investment assets
Principal Residence
Release equity from the principal residence by selling or downsizing the home or through a reverse mortgage, in order to provide each spouse with non-registered investment assets
