Rita*, 61, and Darcy, 60, built half their careers in the United States and the other half here in Canada. They now live and work in Quebec. The bulk of their retirement savings are in U.S. employer-sponsored retirement plans and they are both eligible for Social Security and
benefits.
Ideally, Darcy would like to step away from his full-time job within the next year. Rita plans to continue in her current job until age 65.
They worry that while Rita is a dual citizen, Darcy is not and is a Canadian citizen. It is their understanding that if Rita dies before Darcy, he would have to live in the U.S. for six weeks a year to qualify for survivor benefits as a non-citizen. “Is this a cause for concern?”
Darcy earns $150,000 a year before tax and Rita earns $45,000. They will each receive defined-benefit pension plan benefits indexed to inflation from their Canadian employers when they retire. At age 65, Darcy will receive $10,800 a year from these plans, plus $7,200 in QPP benefits. Rita will receive $4,500 a year from her employer pension plan and $4,560 a year in QPP payments.
At age 62, they are each eligible for Social Security. Darcy will receive the equivalent of $25,000 a year and Rita the equivalent of $29,000. “How will this impact QPP and
(OAS),” asked Rita. “And when is the best time to start taking (these)?”
The couple owns a home valued at $700,000 with a $230,000 mortgage at 3.75 per cent. They have no plans to move for at least the next several years. Their investment portfolio includes about $100,000 in
registered retirement savings plans
(RRSPs), $15,000 in tax-free savings accounts, about $25,000 in stocks and US$950,000 in 403(b) tax-sheltered annuity plans.
“Should we move the U.S. accounts to Canada and put that money into RRSPs? What are the tax implications? Or should we start withdrawing from them? And if so, when and should I draw mine down first, as my income is lower than Darcy’s?” asked Rita. “Our investment adviser has recommended a cross-border tax adviser to do an assessment, which will cost $15,000. Is this fee typical for this type of assessment?”
Rita and Darcy also have a $650,000 term-life insurance plan and two $100,000 whole life insurance plans, and Darcy also has $350,000 of life insurance through his employer, but it will stop when he retires. “Are we over-insured?” asked Rita.
Rita and Darcy would also like to know if they should consider cashing in some of their stocks, the cash value of their life insurance or maybe even some of the 403(b) assets to pay off the mortgage. From a peace of mind standpoint, they feel it would be nice to put the mortgage payments toward new savings or simply reduce their cost of living.
The couple’s annual cash flow is about $90,000, an amount they anticipate will likely stay the same in retirement.
“Are we really going to be okay?”
What the expert says
“For Darcy to retire next year and Rita to retire at age 65, they need just over $1 million in investments,” said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger. “They are projected to have more than $1.6 million, so they are 44 per cent ahead of their goal. They can confidently retire with a comfortable margin of safety. This assumes that they will be happy maintaining their current lifestyle through their retirement.”
Rempel also said they have no reason to worry about qualifying for U.S. survivor benefits as a Canadian citizen. “U.S. Social Security has an Alien Nonpayment Provision that non-U.S. citizens living outside the U.S. have to spend one month, not six weeks, in the U.S. every six calendar months. There is an exception for Canada in the U.S.-Canada Totalization Agreement. If Darcy outlives Rita, as long as he lives in Canada or the U.S., he will continue to collect Social Security.”
As for how to best manage their U.S. accounts, Rempel suggested a simple option: Roll the U.S. retirement plans into Individual Retirement Accounts (an IRA, often described as the U.S. version of an RRSP), which has lower fees and better investment options and returns than 403(b) accounts.
“This is a tax-free transfer and there is no penalty since they are both over age 59 1/2. Fees for cross-border tax advisers vary based on time and complexity; however, a basic plan with some retirement planning, RRSP or IRA transfers and dual residency advice is typically closer to $5,000, not $15,000. A quote of $15,000 may be for a complex or high-net-worth situation.”
When it comes to the question of life insurance, Rempel recommended they cash in their high-cost whole life policies and replace them with a term-to-100 policy for Rita or a joint first-to-die term-to-100 policy.
“When the first one of them passes away, the survivor will lose the lesser of their annual Social Security benefits, 40 per cent of the QPP and all of the OAS for that person. The Social Security and QPP loss would be about $38,000 a year of income. To provide this for 30 years, they would need about $650,000 of life insurance on each of them that continues into retirement.”
As for the mortgage, “At the current low mortgage rate of 3.75 per cent, it will take 16 years to pay it off. Their investments should all get higher returns over time than the mortgage interest rate,” said Rempel.
“They will have to pay tax on any money withdrawn from their registered accounts to pay down the mortgage. This means they would have to cash in about $330,000 in one of the investments to retire the $230,000 mortgage. Their best option is to keep the mortgage and make the lowest possible payments on it.”
*Names have been changed to protect privacy.
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