Can A Gic-only Rrsp, Tfsa And Lira Generate Enough For Miles’s Retirement?

Miles* loves his job but at 65 he is winding down his work life and preparing to join his wife, Eileen* as a retiree. He has already transitioned to a four-day work week. Next year, he plans to work three days a week, before stepping away from the workforce when he turns 68, at which point he plans to start receiving Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.

The couple manage their finances independently. Unlike Eileen, who has an indexed employer pension, Miles will be relying solely on his investments , CPP and OAS to fund his target annual retirement income of $90,000 before tax. He currently earns $110,000 a year before tax and his annual expenses are approximately $45,000.

“My biggest concern is the high cost of living and the loss of employer benefits when I retire,” said Miles.

A low-risk investor, Miles has built a self-managed portfolio that includes $400,000 in a locked-in retirement account (LIRA), $700,000 in a registered retirement savings plan (RRSP) and $80,000 in a tax-free savings account (TFSA), all invested in Guaranteed Investment Certificates (GICs) generating returns of about three per cent.

“As I get older, I don’t have time to make up for any market losses, which is why I’m invested in GICs,” he said.

Miles plans to convert his LIRA to a life income fund (LIF) at age 68 and his RRSP to a registered retirement income fund (RRIF) at age 69 or 70. “Is this a good idea? What does it entail? What is the best approach to withdrawing funds to avoid OAS clawback,” he asked.

Miles and Eileen are mortgage-free and own a home valued about $800,000 in the Greater Toronto Area. They would like to move to a smaller, more affordable town in the next three to four years. Before they do, Miles will buy a new vehicle, which he anticipates will cost about $50,000. The couple each have term life insurance policies that expire in two years. “We took them out as mortgage insurance, but don’t need the coverage any more.”

Miles’s plan for a job-free future is to continue to travel with Eileen and spend more time on the golf course. “We don’t have children. Anything that is left in the estate will go to our nieces and nephews. I want to make sure I am managing my investments in the most tax-efficient way, ensuring I will be able to meet my cash-flow needs.”

What the expert says

Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, said he likes Miles’s phased approach to reducing his working schedule, which, he says, will help him with the psychological as well as the financial transition to retirement.

“This will give him time to complete a retirement income plan, one that reflects his conservative investment style while also demonstrating the impact of other portfolio models. Perhaps most importantly, a retirement income plan will show him if he’s on track to generate the retirement income he needs in a tax-efficient way.”

According to Einarson’s calculations, Miles is on track to meet future needs with his assumed maximum CPP and OAS benefits making up 40 per cent of his target income and the rest coming from future RRIF withdrawals. However, sticking to 100 per cent GICs will intensify Miles’s concern about the rising cost of living and deplete his registered accounts by age 85.

“That outcome may be acceptable to Miles, as he will still have his TFSA and non-registered investments, which he hopes to continue adding to, as well as some home equity that may become available upon downsizing,” said Einarson.

“Conservative investments can play an important role in a retirement portfolio, but being too cautious can create other risks, including the gradual loss of purchasing power or the possibility of outliving his savings.”

Einarson suggested Miles could consider a low-risk but more diversified mix of investments, including higher yielding bonds, keeping some GICs, and a small percentage of solid dividend paying stocks for the yield and greater gains over time. Or, he could apply this conservative yet balanced approach to his non-registered investments and TFSA only, since he likely won’t need these funds until his mid 80s, he said.

“Ultimately, his plan and investment structure should reflect the outcomes he is comfortable with as an investor, rather than simply following what statistics suggest he should do,” said Einarson.

“Adopting a three-bucket asset allocation approach (a bucket for cash to meet immediate needs, one for bonds to provide three to six years of income as insurance against market dips and a bucket of equities to generate dividend income and growth) and creating a well-constructed and actively managed portfolio should navigate the real tension between growth, security of capital and consistency of returns while supporting a smooth transition into de-accumulation,” he said.

Einarson recommended Miles convert accounts when he needs income, using the least flexible sources first; for example, taking the LIF maximum income and the rest from a RRIF. “His financial institution or planner can help him decide when to convert and how much to convert to a RRIF to meet his needs while preserving government benefits,” he said.

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“The best withdrawal strategy is to map out taxable income across retirement. With larger registered accounts, this may mean drawing more income than immediately needed in the early years. For some retirees, taking additional income up to the OAS clawback threshold can help reduce the risk of higher clawbacks later.”

Einarson recommended he tap the guidance of the financial institution where he invests or a fee-based portfolio manager to create a retirement income plan. Alternatively, even though Miles and his wife manage their finances separately, they could look for a fee-for-service financial planner in their area, he said. “A joint plan may uncover complications or opportunities they hadn’t considered, such as estate challenges or income-splitting advantages.”

*Names have been changed to protect privacy.

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