Spouses Linda*, 71, and Germain*, 69, are retirees in good health and living a sensible lifestyle who are looking to rekindle their travel plans after the pause forced by the pandemic.
Posted at 5:00 am
The situation
However, as they age, Linda and Germain are concerned about the financial impact of these travel plans on their long-term financial security as they increasingly rely on support and maintenance services.
“We want to travel again while we still have the health and ability to do so. But instead of traveling independently as before, we will travel in a more controlled and organized manner and therefore more expensive in the future,” explains Germain in an interview with La Presse.
Right now, Linda and Germain are considering a travel budget of about $20,000 a year, to be funded from their current budget surplus of about $30,000 a year.
This is the balance between Linda and Germain’s net (after-tax) retirement income, which totals $78,000, and their current expenses, which are in the order of $48,000 per year.
So, at first glance, Linda and Germain would have the financial means to re-launch their travel plans. But they are surprised at the low level of their pension accounts (RRSP, RRIF, TFSA), which are independent of Germain’s pension fund – the only one of the couple – and their state pension scheme (PSV Bund und Länder QPP).
“My personal RRSP and RRIF [ancien REER converti] from my wife, from where she starts making the minimum required withdrawals, totals about $190,000 in assets, explains Germain.
“But our TFSA accounts that we just funded are about $57,000. It seems very little to us like a standalone retirement plan in case we face costly medical or nursing risks as we age. »
Germain also notes that he and his wife have no intention of reselling their home, which has a net worth of approximately $530,000 (mortgage excluded) and is “in very good condition” for as long as they can live there. even with domestic help.
Additionally, Linda and Germain have no inheritance plans for their two children, preferring instead to support their ongoing expenses as young families while they are alive.
Pay
Germain*, 69 years old
Total Income : $86,900
(Employer-funded pension: $67,000Province QPP: $11,660Federal PSV: $8250)
Financial assets :
RRP: $81,200
TFSA: $8200
Linda*, 71 years old
Total Income : $17,500
(Federal PSV: $8250Province QPP: $4260Minimum withdrawal RRIF: approx. $5000)
Financial assets :
RRIF: $112,000
TFSA: $49,000
Joint property of the spouses:
– in a current account: $10,000
– Net value of the apartment: approx. $530,000
Joint budget of the spouses:
Net pension income (after taxes): approx. $78,000
Cost of living: approx. $48,000 ($10,000 related to the stay, $38,000 related to lifestyle and financial support of loved ones)
Available surplus: approx. $30,000
In this context, Germain asks: “Before we restart travel spending, should we rather use our budget surplus to quickly top up the contribution amounts available in our TFSAs and thus increase our financial security in old age? »
“And if so, could we still modulate those contributions in TFSA without having to make too many cuts in our travel plans?” If so, how would it be advisable to split these amounts between the two sides? »
Linda and Germain’s situation and questions were brought to Mathieu Huot, financial planner and tax specialist at IG Wealth Management in Terrebonne, for analysis and advice.
Advice
First, Mathieu Huot says he’s a little surprised by the significant difference between spouses Linda and Germain’s gross income (about $104,000) and net after-tax income (about $78,000).
At the same time, he points to the significant difference between Germain’s gross retirement income ($86,900) and that of his wife Linda ($17,500).
PHOTO PROVIDED BY MATHIEU HUOT
Mathieu Huot, financial planner and tax specialist at IG Wealth Management
“The $26,000 difference between their gross income and their net income suggests that Linda and Germain pay a lot in taxes compared to their situation as independent seniors,” says Mathieu Huot.
“And considering the significant differences in the size of Germain’s and Linda’s individual gross incomes, the evidence suggests that they have not yet resorted to the tax mechanism of ‘income splitting’ between elderly spouses to reduce their total tax.” Mr. Huot firmly.
According to his estimates, Germain and Linda could save about $4,000 to $5,000 a year in tax savings, which would increase their budget for travel plans by the same amount.
Consequently, Mathieu Huot points out, “This should be your priority this year in terms of tax optimisation. To prepare for upcoming tax returns [2023] on their retirement income [régime de retraite, PSV fédéral, retraits de REER/FEER]but also in a specific request to Retraite Québec regarding the sharing of benefits from the provincial QPP.”
Travel and save?
Second, regarding Linda and Germain’s concern to carry out travel plans “while they are able” without jeopardizing the financial security of their advanced age, Mathieu Huot can assure that they are able to pursue these two goals in parallel .
How it goes ? “Considering that their budget is complete, Linda and Germain already have the benefit of a budget surplus of around $30,000, which could be matched by a few thousand dollars next year from tax savings from the implementation of their income splitting,” stresses Mr. Huot .
“In addition, Linda and Germain anticipate an annual travel budget of around $20,000. If they can stay within that budget while keeping their current expenses current, they should have about $10,000 a year available for contributions to their TFSA as a bonus to their retirement savings. »
At that rate, and considering an average annual return of 3.75% on their capital in TFSAs and RRSPs/RRIFs, and inflation indexing at 2% per annum on their daily living expenses and their retirement pensions, Mathieu Huot estimates that Linda and Germain could in twenty years or still have capital in the region of $800,000 as they approach their 90th birthday.
Additionally, the net value of the eventual resale of her home – estimated at $530,000 – is excluded from this retirement savings estimate.
“With their current budget, Linda and Germain can be confident that they can fulfill their travel plans while continuing to improve their retirement savings,” says Mathieu Huot.
No trip or savings?
And what if Linda and Germain’s budget priorities change fundamentally over the next few years?
To answer this question, Mathieu Huot contrasted two budget hypotheses: the first, where the $30,000 budget surplus would go entirely to retirement savings, excluding travel expenses; and a second where the available $30,000 would be used entirely for travel expenses, with no additional contribution to retirement savings.
The results of these two hypotheses?
“With the first, Linda and Germain would have accumulated about 1.4 million in retirement savings in their early 90s and almost 1.9 million if they added the net resale value of their home,” summarizes Mathieu Huot.
“It seems to me much more than their foreseeable needs unless they have inheritance intentions for their loved ones. Also, Linda and Germain would have refrained from traveling in the years that they were able to. »
Using the second financial hypothesis, all traveling and no additional retirement savings, Mathieu Huot estimates Linda and Germain’s retirement savings at $455,000 in their early 90s and about $955,000 when you add in the net resale value of their home.
“It appears to be sufficient for her household needs until the foreseeable end of her life. However, there would be little scope for gift projects or inheritances to loved ones. And not to mention a possible financial regret for having spent a lot on travel with no regard for strengthening their retirement savings,” believes Mathieu Huot.
* Although the case highlighted in this section is real, the first names used are fictitious.
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