Q: I have recently been made redundant at age 60 and need to generate a net annual income of approximately $35,000 for the next three to five years until my other pensions kick in. Currently, my wife (who is 62) and I each have approximately $200,000 in our RRSPs and about $90,000 each in our TFSAs. All four accounts hold the following ETFs:
BMO Low Volatility Canadian Equity ETF (ZLB)— 25%
Vanguard S&P 500 Index ETF (VFV)—25%
First Asset Morningstar International Momentum Index ETF (ZXM)—25%
BMO Long Corporate Bond Index ETF (ZLC)—25%
Can you advise on the best way to generate the investment income we need and still preserve most of our capital?
– Jerry W
A: Jerry, I’m sorry to hear about your employment situation: being dealt a blow like that at age 60 is undoubtedly stressful. The good news is that you should be fine financially if you only need to tide yourself over for a few years until your Canada Pension Plan (CPP) and Old Age Security kick in.
With a total portfolio of $580,000 and the desired income of $36,000 after taxes, you will need to draw more than 6% per year. No safe investment generates a yield like that, so you will certainly be digging into capital, and that would not be sustainable throughout your retirement. But if you’ll scale back those withdrawals significantly once your government pensions begin, you may be able to make it work.
Before we go further, though, I should stress that a proper financial plan will be extremely useful in your situation. All I can do is offer some big-picture ideas, whereas a fee-only planner can do a full analysis and give you specific recommendations.
My first observation is that your portfolio, while reasonably well diversified, is quite aggressive at 75% equities. This is certainly not a portfolio designed to preserve capital: it’s more appropriate for a young growth-oriented investor. Now that you are drawing it down, you will want to make it significantly more conservative.
Let’s consider the fixed income component: you have everything in long-term corporate bonds, which can be fairly volatile. I would suggest you consider adding some GICs here instead, as these will add more stability. Since you are planning to draw at least $35,000 from the portfolio over the next three to five years, you might even consider using a ladder of GICs with about that much in each “rung.” That will guarantee that your annual cash flow is available no matter what happens in the stock and bond markets during that time. This can provide real peace of mind.
Just as important as your investment holdings, however, is determining the right accounts to draw from during these next few years. As you likely know, withdrawals from your TFSAs are tax-free, whereas RRSP withdrawals are fully taxable.
If you have no employment income today and you’re not planning to take CPP until age 65, this might be an opportunity for you to make early RRSP withdrawals, as you will likely be in a very low tax bracket. For example, if you’re in Ontario and have no other income, a $15,000 RRSP withdrawal would trigger only about $700 in taxes.
The most tax efficient plan for you might be to use a blended strategy, drawing some from the RRSPs until you’re no longer in the lowest tax bracket, and then taking the rest from the TFSAs.
Finally, it would be worth considering whether it makes sense for you to take your CPP benefits before age 65. You would, of course, receive a lower monthly amount, but if you need the income now, you should at least consider this option. Again, a financial planner can run projections for you and help frame your decision.
Jerry, I wish you all the best during these next few years and hope you will be able to enjoy a comfortable retirement.
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