Millionaire couple need retirement estate advice

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Married Newfoundland and Labrador-based couple Patrick, 54, and Sheila, 51, effectively retired in 2019 when he started winding down his small business and they’ve been living off its cash reserves, but that is coming to an end soon.

Since they retired, they have been “practising” what it will be like to live on investment income. Specifically, they have been drawing dividends from the corporation’s cash reserves (currently $100,000). In January 2025, these funds will be depleted and they plan to start living on their personal investment savings.

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The couple are debt free and in addition to their primary residence (valued at $400,000), they own land and a cabin ($195,000) in their home province. They recently sold a rental property for $285,000 (minus a $24,000 mortgage) and used those funds to purchase a second vacation property in Florida for their three adult children and grandchild.

A lifelong saver, Patrick has for the past eight to 10 years transitioned out of mutual funds into a self-directed investor, buying dividend-paying stocks.

“My approach has always been to save first, spend the rest,” he said.

That approach has helped him build a healthy portfolio, largely composed of blue-chip stocks held in tax-free savings accounts ($408,541), registered retirement savings plans ($1.36 million), a locked-in retirement account ($116,851) and a non-registered joint account (about $1.1 million). The portfolio generates $146,000 each year in dividends, all of which are reinvested.

The plan is to start drawing about $137,000 in dividends from each of their personal investment accounts next year, but Patrick is considering options to extend his current dividend reinvestment plan to continue to grow his and Sheila’s portfolio beyond January.

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In 2023, the couple equally split $130,000 in dividend income from the business. Sheila started working part time three years ago and plans to continue earning about $20,000 a year. Their average monthly expenses are $10,000. She has $150,000 worth of Microsoft Corp. shares in her RRSP.

“Should we sell them and then invest in more dividend-paying stocks to get more annual income?” Patrick wondered.

Patrick and Sheila have $75,000 life insurance policies for each of their three children with a combined cash surrender value of $45,000. They also have a joint 35-year $650,000 term life insurance policy that matures when he is 74 and she is 79. Patrick’s business owns a universal life insurance policy worth $291,000, with a cash surrender value of $136,080.

“I don’t think I need my term life insurance because I have enough money, but I’d like to know what the expert thinks,” he said. “That policy is payable to my company. However, when I close my company, it will transfer to me and I’ll have a big tax bill.”

As a result, Patrick wonders whether he should cash in his policy at cash value, save that money in the company and continue to draw from that sum instead of drawing down his registered and non-registered investment accounts. This would allow him to continue reinvesting dividends and he can then draw a higher income when he does decide to take money from his investments.

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What the expert says

“Patrick and Sheila are in a good financial position to enjoy life on their terms, but retirement is a long journey with many stages,” Eliott Einarson, a retirement planner at Ottawa-based Exponent Investment Management, said.

“Getting a professional retirement plan will provide an overview of all assets and the effects of drawing income throughout retirement, as well as seeing various what-if scenarios for their future and help them determine when to take Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.”

Another top priority given the complexity of their different assets: an estate plan.

“Neglecting to update wills and estate planning is a common problem in Canada and complexity only adds to the potential for future family issues,” Einarson said.

He agrees with Patrick that with more than $1 million in unregistered investments, transitioning away from mutual funds is not a bad idea.

“As a self-directed investor, it is paramount to do your research and have a well-defined investment discipline or you can be prone to common pitfalls and costly mistakes,” he said.

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The other option is to hire a full-service investment management firm for both personalized portfolio management and ongoing financial planning.

After this year, Patrick’s business will be out of cash and can be closed, unless the couple cash out the universal life insurance policy in the business, which will allow the couple to live off their investment accounts’ cash flow.

“That math is simple enough: they need $10,000 a month, Sheila earns $20,000 a year and they have almost $150,000 a year of passive income from the investment accounts before tax,” Einarson said. “A retirement income plan will help them map out the income from investment accounts, integrate future earnings, CPP payments and OAS payments, and illustrate the value to both a survivor and their estate of using taxable accounts over time for income.”

He said that for some people, it is possible that deferring income from the registered accounts means that the future tax burden negates the benefit of delaying the income from them. This could also allow the couple to let the non-registered and TFSA investment accounts continue to reinvest their dividend payments and grow.

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As for whether or not Sheila should sell her Microsoft shares, Einarson said with one company making up a third of her RRSP, or 19 per cent of her total registered accounts, they are breaking a common rule of diversification.

“On top of that, they must decide if the company is overvalued and what the best alternatives are considering their portfolio construction goals and other holdings,” he said.

But when it comes to life insurance, Patrick has already answered his own questions.

“Insurance is no longer a need for them; it’s now a luxury,” Einarson said. “If they don’t need insurance for estate equalization or a dependent adult child, they could eliminate it and the cost. Also, the value of the policy in their corporation could be used for another year of income before having to access personal assets.”

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