retire well

How to Retire Well – Build your three-layered pyramid.

You can picture it in your mind, that image of the attractive, elderly couple smiling in a sunbeam? Aren’t they cute? And then we see the tag line about the importance of planning for your future, being generally responsible with your money, getting “Cash for Life” or something of the like. To retire well.

But what does it mean to retire well? How should I think about and plan for my golden years?

I like to visualize a sound retirement plan as a three-layered pyramid.

The Foundation – Your Financial Independence

The most important component of the program is a solid foundation, namely your Financial Independence. I define Financial Independence as the accumulation of assets (assets simply being anything that earns money for you without labour) such that the income from your assets is greater than your lifestyle expenses.

The particulars of how much is needed, what types of investments you should look at, and what your timeframe should be are all particular to your family. But, generally, you should make sure that you have different sources of income, guarded against inflation, guaranteed for life.

In other words, a solid foundation.

The Mezzanine – Your Legacy

For most people, family is a very important dimension of their life. Once you are finished with your assets, how do you want them to be transferred to the next generation? There are plenty of considerations here.

For example, in Canada in 2020 it is very common for retirees to live into their 90’s. This means that your adult children are likely between the ages of 55 and 70 upon receiving an inheritance. Consequently, it may be sensible to consider the benefits of leaving money to grandchildren, although that should also be handled with care. Nothing ruins an 18-year-old’s life faster than an unearned million.

Legacy is all about who gets what, when and how. You want clear direction in a professionally drafted Will. Estate settlement is known to bring out the worst in certain people. The more money on the table, the more it makes sense to go to court over it.

The Pinnacle – Your Social Contribution

At the peak of our pyramid, we deal with life’s other certainty – taxes.

Upon your death, the CRA will come knocking. Now, in Canada there is no true estate tax, unlike south of the border where larger estates can be subject to direct taxation. That by no means exempts a Canadian estate from paying other taxes.

Lawyers often draw attention to the Estate Administration Tax (EAT – where was the focus group on that decision?), formerly known as probate. In Ontario, this is a paltry 1.5% on estate assets beyond the first $50,000. And while the absolute value can grow to an impressive number on very large estates, the truly massive amounts billed tend to be charged on the final income tax return. In my experience, most folks have a limited appreciation of the impact of income taxes on their future estate.

The most common tax-bomb scenario is the one-time payout of Registered Retirement Savings Plan or Income Fund (RRSP/RRIF) assets. Upon the death of the second spouse and barring the existence of a disabled or minor child, the value of the RRSP is counted as income all in one year. For accounts north of a few hundred thousand, you can comfortably cut those accounts in half as an estimate.

There are tools to help reduce that bill, one of my favourite being Donation Tax Credits. How to structure an estate gift can make for a very positive conversation on a downbeat subject.

So, you will make a contribution to society – you just get to choose how you want to do it; to the CRA or to the charity of your choosing.

Sound planning can prevent future chaos and acrimony, both in your retirement years and for your beneficiaries. Financial professionals are a key in this process, so be sure to involve trusted advisors who have expertise in these areas and get ready to retire well.

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