Financial planning for retirement doesn’t only involve making sure you have the investments and pension income needed to sustain you for decades. It also requires smart tax planning to avoid nasty claw-backs of Old Age Security (OAS) payments.
A recent experience with one of our clients illustrates the issues and strategies to avoid losing out. Our client is retired, recently sold her house and is currently renting a condo. Her pension income, combined with CPP and OAS, were getting close to a level where some of the OAS was about to be clawed back.
This was going to interfere with her desire to pursue the bucket list of activities she had planned for her retirement. She raised the issue with us because she was anxious that her well-planned retirement would be undermined by this added burden.
We worked the numbers and revised the strategy for her financial plan. We built a portfolio of non-registered funds out of the proceeds of the sale of her house. Our objective was to make sure the depletion rate of the portfolio remained comparable to the target growth rate after taxes.
We had to weigh the advantage of Return of Capital Funds that allow for highly tax-efficient distribution of capital, versus the client’s need for stable income. This necessitates a greater reliance on bonds, which produce less robust growth potential, and a higher tax burden.
So how did we achieve a balance? We used funds that distribute 5-6% of the capital on a monthly basis. Since that represents a return of the original capital, there are no taxable capital gains. To avoid interest and dividends being taxed, we used Corporate Class funds which are allowed to use interest and dividends against fund expenses first, reducing the amount of interest and dividends that will have to be distributed. Once the original capital is used in about 20 years, distributions will be taxed at the preferential capital gains rate.
While keeping on top of the distribution of funds, we were also determined to grow the original capital, in case her expenses increase dramatically due to medical issues, or her need to enter a seniors’ home.
We were very pleased to be able to offer her a solution that served her short and medium-term needs to live her life, while preserving her capital as a safety net for the future.
Do you have a financial problem that you need outside assistance to solve? We love to be able to help clients enjoy life to the fullest, while also feeling financially secure. That’s what we all aim for.
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