Robert and Kristel want to give their two children at least $100,000 each toward a down payment on a home.Duane Cole/The Globe and Mail
Robert, a do-it-yourself investor, wonders if his strategy of living mainly on dividend income is sustainable. “My wife and I are retired and enjoy a modest but acceptable income,” Robert writes in an e-mail. They will both turn 65 this summer.
“In the next three to five years I will be cashing in a lot of stocks to help my kids with housing,” Robert adds. He and Kristel want to give their two children at least $100,000 each toward a down payment on a home.
“Our one financial goal is to live off our dividends and interest without drawing down the principal,” Robert writes. “We are 100 per cent in the market.” Their average dividend yield is 3.41 per cent and their average annual return on investments is 7.3 per cent.
“Should we be happy with our numbers and our performance? Are we safety-proof enough?” Their retirement spending goal is $100,000 a year after tax, considerably more than they are spending now.
We asked Ross McShane, an independent, advice-only certified financial panner in Ottawa, to look at Robert and Kristel’s situation. Mr. McShane also holds the chartered professional accountant designation.
What the Expert Says
Robert and Kristel have lived frugally over the years and have managed to create a sizable amount of wealth, Mr. McShane says.
They have been living on $65,000 a year after-tax, not including tax-free savings account contributions. They would now like to travel more extensively and wonder if $100,000 after tax is sustainable without dipping into their capital.
Their portfolio is 100 per cent stocks with 85 per cent in Canadian companies. They focus on blue-chip companies that pay a healthy and growing dividend.
Kristel and Robert took early Canada Pension Plan benefits and will be entitled to Old Age Security starting this summer. “These sources of income partly support their after-tax needs, with the balance drawn from their investment portfolio,” the planner says.
For 2025 their numbers break down as follows: CPP $16,697, part-year OAS $7,277, and a withdrawal of $76,931 from their non-registered portfolio – $40,000 of dividends and $36,000 from the sale of stocks – for a total of $100,905. Subtracting income tax of $905 leaves them with the target $100,000 a year. With the dividend tax credit, income-splitting and other credits, they pay very little tax.
They maximize their tax-free savings account contributions annually.
In preparing his forecast, the planner has assumed lifestyle expenses of $100,000 a year after-tax, indexed to inflation. Gifts of $100,000 to each of the children are included in 2030. A vehicle purchase of $50,000 is included in 2026 and every 10 years thereafter. An annual allowance of $5,000 is added for house repairs and maintenance.
“Based on the assumptions, they are projected to have a surplus of wealth and are in a favourable position,” Mr. McShane says. “I am pleased to see that at their stage of life they wish to increase travel and dip into their hard-earned wealth.”
To be conservative, he assumes a 5.5-per-cent annual rate of return on their stock portfolio. The forecast also assumes an average annual inflation rate of 2.1 per cent.
“I have run a second, even more conservative scenario assuming a 4.5-per-cent rate of return based on a balanced portfolio of stocks and bonds,” Mr. McShane says. “In this scenario, they can still cover their needs and leave a sizable estate.” A fixed-income component would add an element of stability to the outcome.
Based on a 5.5-per-cent return, the withdrawal rate in a year where there are no major expenditures – the dollar amount of the portfolio withdrawal divided by the portfolio value – is about 3 per cent, or about $76,000 a year. This is covered by the dividend income stream alone without having to rely on capital appreciation – “a fortunate situation for them,” the planner says.
A downturn in the stock market will not affect their retirement income goals as long as the companies they own continue to pay dividends at the same rates or higher. “Ideally, they want to continue to hold companies that not only have sustainable dividends but a history of growing their dividends because this provides a hedge against inflation,” Mr. McShane says.
If they become uncomfortable with the market outlook or the sustainability of their dividend income stream, they should consider either reallocating to companies with stronger fundamentals or shifting a portion of the portfolio to fixed-income investments such as guaranteed investment certificates or bonds, he says. “Bringing in bonds would lower the rate-of-return expectation, but they could still achieve their goals.”
If they decide to lower their stock weighting, they could do so within their RRSPs, where the capital gain is not subject to tax in the year realized, the planner says. Income earned in the RRSP is deferred and then taxed as ordinary income upon withdrawal.
Robert and Kristel are both in the 20-per-cent marginal tax brackets. “I recommend they at least target the top of the 24.15 per cent marginal tax bracket, which means keeping taxable income to just below $57,375 a year each,” he says. They are currently at just over $40,000 each. “In fact, a strong argument could be made to withdraw more from the RRSPs to target $93,000 each of income to keep them just below the OAS claw-back threshold.” This strategy means giving up some tax deferral but serves to minimize the amount taxed to the estate.
There is always the concern that upon the death of the second spouse, remaining RRSP balances will result in a hefty tax hit to the estate, he notes. Their withdrawal plan should be reassessed annually.
With a non-registered portfolio of $1.2-million, the dividend income should be drawn first and not reinvested, the planner says. The balance of funds needed can be drawn out of the non-registered portfolio by selling stocks. A withdrawal can be made from their RRSPs at year-end to hit the taxable income target.
In 2026, the GICs should be earmarked for the vehicle purchase.
When they turn 65, they should convert some RRSP funds to registered retirement income funds (RRIFs) and withdraw $2,000 a year each to take advantage of the pension income credit.
“My analysis shows that the OAS clawback will not be an issue for them based on their spending and withdrawal requirements,” the planner says.
When the time comes to gift funds to their children, Kristel and Robert can sell stocks in their non-registered portfolio to raise the necessary cash. At that time, they should review the capital gains impact to avoid a situation where they get pushed into a higher marginal tax bracket or above the OAS claw-back threshold, the planner says. If that seemed likely, they could withdraw funds from their TFSAs instead without tax implications, replenishing the TFSAs later from their non-registered funds.
If they have a growing surplus, Kristel and Robert could consider gifting additional funds to their children from the non-registered account. “This will allow them to lower the tax bill to the estate and further assist the children and perhaps their grandchildren while Robert and Kristel are living,” Mr. McShane says.
Client Situation
The People: Robert and Kristel, both 64, and their children, 26 and 28.
The Problem: Can they afford to spend more, give money to each of their children for a down payment on a home and still leave their capital intact? Is their investment strategy suitable?
The Plan: Manage their tax brackets. Keep an eye on financial markets and shift to a more balanced portfolio if they are feeling nervous.
The Payoff: A balance between minimizing taxes now and to their estate.
Monthly net income: As needed.
Assets: Cash and short term $40,500; non-registered stocks $1,195,000; other $12,000; his TFSA $340,000; her TFSA $146,000; his RRSP $598,000; her RRSP $213,000; residence $1,200,000. Total: $3.7-million.
Monthly outlays: Property tax $600; water, sewer, garbage $90; home insurance $125; electricity $95; heating $100; maintenance, garden $220; transportation $335; groceries $1,100; clothing $50; gifts, charity $160; vacation, travel $1,700; personal discretionary $160; health care $220; health, dental insurance $290; phones, TV, internet $230; TFSA $585. Total: $6,060. (Spending may be understated.)
Liabilities: None.
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