Snowbirds face hurdles achieving desired retirement lifestyle

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Married couple David* and Felicia are 64 and 54, respectively, newly retired and seem at first glance to have enough to maintain their desired lifestyle, but they have concerns about growing their nest egg, saving on taxes and getting a different perspective.

Felicia is a dual Canadian-United States citizen and David has U.S. status. The couple are also business partners and have lived and worked in the U.S. Today, Ontario is home for about seven months of the year and they spend the remaining five months in the southern U.S., something they’ve been doing for about 10 years and would like to continue to do for as long as possible.

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The couple invests with brokerages in Canada and the U.S., as well as on their own via self-directed accounts, and has built a portfolio worth about $3.14 million. At this point, they are both newly retired and want to make sure they are doing all the right things to maintain their lifestyle long term.

“Having worked with the same advisers for more than 20 years, we also want a different perspective,” David said.

A neuromuscular disease forced David to wind down the couple’s renovation business two years ago, which was earlier than expected but necessary. They are still adjusting to life in retirement and trying to get a handle on their income.

“Last year was my first full year of not working,” he said. “I now have multiple sources of income from pensions and investments, and it’s hard to know what my income will be going forward.”

In 2023, their combined annual income before tax was approximately $130,000. This includes $62,090 in dividends, $4,980 in Canada Pension Plan (CPP) payments, $29,027 in Social Security benefits and a former employer pension, $10,000 in interest income and $3,000 in earned income for Felicia from part-time work.

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David also started drawing down $500 a month from his registered retirement income fund (RRIF) when he retired and the same amount in U.S. dollars from his individual retirement arrangement (IRA) account. He has also been receiving $583 in disability benefits per month, but this will end in the next few months, and recently received a lump-sum disability payment of $8,244.

The couple owns a home valued at approximately $500,000, $60,000 in cash, $249,000 in tax-free savings accounts (TFSAs), $378,000 in registered retirement savings plans (RRSPs), $66,530 in guaranteed income certificates (GICs), $113,000 in a locked-in retirement account (LIRA), $1.22 million in mutual funds, $955,380 in stocks and a $100,000 debenture David recently inherited from his mother’s estate that pays $6,000 a year.

David also has a self-directed account in his name alone, which means he cannot share the tax liability on earnings. He recently learned he could open another self-directed account in Felicia’s name and transfer stock in kind.

David and Felicia’s total annual expenses are $110,000, including about $28,000 for their stay in the U.S. and $14,000 for their TFSA contributions.

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David would like to know when he should start drawing Old Age Security (OAS) and when Felicia should start CPP.

“Are we on the right track? How can we be more tax efficient? I feel like we have a lot, but it’s all over the place,” David said. “I’m starting to think about ways to set our finances up and then forget about them. Maybe annuities would be smart? I’m paying $15,000 a year to my investment broker. The fees are tax deductible, but it seems like a lot.”

What the expert says

With a portfolio worth $3.1 million, David and Felicia are on the right track and then some. Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, estimates they will need $1.7 million in investments returning six per cent to live the life they want.

“Their current lifestyle costs them $96,000 a year after tax, not including TFSA contributions, which can be made by transferring non-registered investments,” he said. “They are 93 per cent ahead of their goal. This means they can afford lifestyle expenses of $130,000 a year, giving them an extra $35,000 each year to enjoy life.”

As far as trying to lower their tax bill, transferring stock in kind to an investment account in Felicia’s name does not allow the couple to split the income for tax purposes.

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“The investments are still David’s, so the income would be “attributed” back to David, unless they can reasonably show the money for those investments originally came from Felicia,” Rempel said.

It’s a general best practice for equity investors to start their OAS and CPP at age 65, while conservative investors should delay them to age 70.

“Delaying CPP from age 65 to 70 gives you an equivalent of a 6.8 per cent a year return on your investments over your expected life, which is less than equity investors are likely to earn, but more than conservative investors,” he said.

Rempel’s biggest piece of advice: David and Felicia need a financial plan to gain clarity on their risk tolerance, desired returns and tax efficiency. This will allow them to make smart decisions and be confident in their future.

“They can decide together on the lifestyle they want, how they want to invest, how to pay the lowest lifetime tax on their desired life and how to set up their retirement income,” he said.

“Annuities generally have a far lower return than equities and have a major long-term risk of being eaten by inflation. They are perceived as risk free, but would have lost money after inflation for 40 years from 1940 to 1980.”

The investment return after fees is what matters in investing, not just the fees, Rempel said.

“If their adviser can help them invest for more growth after fees than they would get on their own, then the fees are worth it,” he said.

* Names have been changed to protect privacy.

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