Q: We are ready to retire within a few months. We are not sure how to handle our investments.
We have about $400,000 in RRSPs through the bank and a mutual fund company. We have a holding company which we purchased a cottage through. We are planning to sell our home and live at the cottage–home value about $1 million. We have no company pensions, but CPP and OAS is about $1,800 per month. My husband is selling his part of his business to his partner for $200,000, which will add to our net worth (not sure of tax implications).
Should we purchase an annuity to give us a monthly income?
We are confused.
A: Your net worth is an impressive $1.6 million, plus the value of your cottage, where you plan to retire. Clearly you and your husband have done well over the years, Joanne.
I can’t say the same for your accountant and your financial advisors. You have tax and retirement issues and questions that have not been addressed, despite the fact that your retirement is mere months away.
Let’s start with taxes. First off, did you know that if you own personal use real estate through a corporation–like your cottage–there are personal tax implications? You either need to have the corporation charge you fair market rent and have the corporation pay tax on that rental income or you need to issue yourself a T4 slip–as if you got paid a salary–for an amount equal to the rent you would have otherwise forked over. If you’re the only ones who use the cottage and it’s not a rental property, so otherwise available to you all year, the rent would be the fair market rent for the entire year.
This could be a major tax issue given you are planning to live at the cottage, presumably for many years to come.
The sale of your home should likely be a tax-free transaction as you can probably claim the principal residence exemption.
Given that you have a holding company, I’m going to assume that your husband’s business is set up as a corporation as well. Assuming he owns shares of the company personally and the business is not owned solely by the holding company, he can likely sell his shares to his partner and claim a capital gains exemption. Business owners can claim up to an $813,600 capital gain on the sale of shares of a qualified corporation, subject to certain conditions and limitations. Many small businesses qualify.
You have a lot of moving parts and would likely benefit from a retirement plan to help you guys understand how all the dust will settle and project out your retirement income, tax payable, expenses, drawdown on your investments, required rate of return and so on. It’s a shame that your financial advisors have never prepared one, from the sounds of it, Joanne.
You will have a lot of taxable investment income in non-RRSP accounts. It will be important to pick the right investments to hold in the right accounts to minimize tax today and in the future. A plan on when and where to draw money from to create a monthly income will be important. It is possible to create an efficient retirement income stream without an annuity, Joanne, so you can look to create a pseudo-annuity with investment income and capital.
Your assets should be able to support–in my opinion–a pretty reasonable standard of living going into retirement. How reasonable it is for you depends moreso on you. Reasonability is all relative.
You ask about annuities. I think they’re a great product in theory. You fork over some money to an insurance company. They pay you a lifetime income based on your age and current interest rates. But therein lies the problem. Buying an annuity now is like buying a 25-year GIC for most retirees and locking in today’s artificially low interest rates.
In practice, I would be hesitant to purchase an annuity right now, but more inclined to consider annuities as interest rates begin to normalize.
The great thing about annuities is that they protect you against the risk of living too long. They’re kind of like an insurance policy in reverse. And given your fairly large net worth and the fact that only a small portion of your retirement income–your CPP and OAS pensions–is guaranteed to last as long as you, annuities may (eventually) be a good option.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.