Paul*, 59 years old and single father of a 14-year-old teenager, is planning an upcoming retirement with the gradual closure of his two businesses: a residential maintenance SME and a real estate investment company that has become inoperative after its asset resale.
Essentially, Paul wonders whether he has the long-term financial means to make such a plan to retire from paid work while maintaining an already relatively modest lifestyle (around $45,000 per year), but satisfactory for her lifestyle with a teenager in shared custody.
At first glance, Paul’s balance sheet appears rather favorable to his retirement plans, with a net asset value of around $1.23 million.
However, a little more than half of this value is made up of the capital of $385,000 from his two SMEs in the process of closing and the equity of approximately $260,000 from his residence (Editor’s note: property value minus the mortgage balance ).
As for the second portion of Paul’s net asset value, it is made up of financial assets distributed two-thirds in registered savings accounts (approx. $446,000 in RRSP and LIRA, TFSA, RESP) and a third in a non-registered investment account valued at $139,000.
In this context, Paul is seeking advice on the reorganization of his assets, excluding the resale of his house, in order to optimize their disbursement as his next and main retirement income.
And this, during the few years before the start of public plan pensions (provincial QPP and federal PSV). But also in good planning for financial longevity until the end of life.
Paul’s situation was submitted for analysis and advice to Julie Tremblay, who is a division manager and financial planner at IG Wealth Management in the Quebec and Lévis regions. Ms. Tremblay is also a former member of the board of directors of the Quebec Institute of Financial Planning (IQPF).
From the outset, Julie Tremblay remarks that “the case of a small entrepreneur like Paul is interesting because he calls on several personal finance and tax skills for retirement planning”.
That said, in order to stick to the essentials for this section, Ms. Tremblay has prepared her advisory analysis in the form of a path of priority stages for Paul over the next fifteen years.
The first steps are planned within four years. That is to say until his teenager reaches the age of majority, and then Paul will be able to adjust the taxable income from his two businesses.
“On the one hand, as a single father of a minor child with shared custody, he receives 50% of family allowances. If he wants to maximize them for as long as his child is eligible, Paul should limit his taxable income to around $36,000 per year.
“On the other hand, considering that family allowances are not taxable, it is an interesting additional income for Paul to continue contributing to his teenager’s RESP [education savings] in order to maximize the grant of 30% on $2500 annual fee. »
In addition, Julie Tremblay advises Paul to favor the complete repayment of his mortgage loan ($140,000) as of its next due date in March 2024, by drawing on his investments in non-registered accounts.
“Considering an average [pre-tax] return of around 4.5% per year on these investments, while his mortgage costs 6% per year in interest which is paid with net after-tax income, it makes sense that Paul is repaying his mortgage on its next due date [in March 2024] when there will be no penalty,” explains Julie Tremblay.
As for the resale of the non-registered investments to pay off the mortgage, Paul must anticipate that it could generate a capital gain of which half (50%) would be added to his taxable income for 2024.
“If these investments are relatively recent, and therefore with a rather limited capital gain, the impact on Paul’s taxable income in 2024 appears insignificant,” anticipates Julie Tremblay.
Furthermore, she says, terminating the mortgage at an interest rate of 6% would allow Paul to subtract some $15,000 in annualized outlays from his residential budget, thereby reducing his net income needs (after tax) to support his lifestyle.
With the elimination of these mortgage costs, Paul will have more budgetary flexibility to manage the next stage of his retirement financial planning.
“During the period from 63 to 70 years, thanks to this budget reduced by mortgage charges, Paul will be able to more easily adjust his income from the disbursement of assets from his businesses according to their tax optimization,” indicates Julie Tremblay.
In addition, “if Paul is healthy with a good life expectancy, he would have more flexibility to delay receiving benefits from public pension funds [RRQ at the provincial level and PSV at the federal level], and then benefit from enhanced pensions until ‘at the end of life “.
“These two annuities from government sources that are indexed annually to the cost of living are important for financial planning for the late retirement of a small business owner like Paul, with no retirement plan other than his personal savings and assets,” indicates Julie Tremblay.
In the case of the provincial QPP, for example, the postponement from age 65 to age 70 is increased by 8.4% per year, or 42% more on the amount of the monthly pension.
In the case of the federal PSV, the postponement from age 65 to age 70 results in a pension amount increased by 36% until the end of life.
