The Bank’s Plan vs. A Real Financial Plan

Mark and Mindy Meltdown approached their long-time bank advisor looking to discuss their retirement plan. Mark (59) hoped to retire from his Ontario regional sales position by year-end and join Mindy (57) who retired from her office administration role earlier this year.

Their finances were in great shape, they felt, with a combined $1.9M in savings and investments, plus a mortgage-free home worth $900,000.

Their bank advisor said, “No problem, meet me at my office and I’ll run some projections for you.”

He did just that, inputting their account balances and expected CPP and OAS amounts into the bank’s proprietary software and handed the report to Mark and Mindy when they met later that week.

The charts were somewhat difficult to comprehend, but the trajectory looked great. Spending about $100,000 per year after-taxes still left the Meltdowns with a comfortable margin of safety and no need to downsize or sell their home in retirement if they didn’t want to.

But something seemed…off.

The “plan” had Mark taking his CPP in April, as soon as he turned 60. It looked like Mindy also took her CPP at 60 in 2029.

“You paid into it all your lives, you might as well take it right away. If you don’t need the income, you can always invest it.”

In another peculiarity, the Meltdowns appeared to pay very little tax (if any) in their first eight years of retirement. Instead, it looked like they withdrew from their non-registered savings, Mark’s non-registered investments, and Mark & Mindy’s TFSAs to top-up their CPP income.

“You don’t have to convert your RRSPs to RRIFs until the end of the year that you turn 71. Let that money grow and compound while you enjoy a few tax-free years in early retirement.”

Mindy noticed another anomaly. They seemed to pay a LOT of tax in 2037 (the couple’s age 70 and 68 year), in addition to an OAS clawback. What’s that about?

“Hmm, that’s the year you want to upgrade your second vehicle, but unfortunately you’ve drained your TFSA and non-registered funds so you’ll have to withdraw more from your RRSPs to fund the extra spending.”

The Meltdowns left the meeting in mixed spirits. On the one hand, they certainly had enough financial resources to retire at the end of the year and live their best life in retirement. But, on the other hand, the “plan” didn’t seem like much thought was put in to optimize their situation.

Taking CPP at 60 would mean a 36% reduction in their benefits. And they still had an awful lot of money in their RRIFs and Mark’s LIF at death. The plan didn’t seem to be very tax efficient.

Mark & Mindy had been watching The Wealthy Barber podcast regularly as they prepared for retirement. They decided to reach out to one of the guests, an advice-only financial planner, for a second opinion.

They paid $4,200 for a detailed financial plan and a year of advice and support.

Here were the biggest differences between the bank advisor’s plan and the advice-only planner’s plan:

• Mark and Mindy delayed CPP and OAS to age 70 rather than taking CPP at 60 and OAS at 65
• They began systematic withdrawals from Mark’s RRSP and Mindy’s spousal RRSP immediately in 2027 rather than withdrawing sporadically from their RRSPs and waiting until age 71 to convert to RRIFs
• Mark unlocked his Ontario LIRA and moved 50% into his RRSP and 50% into a LIF rather than moving the entire LIRA balance into the LIF (which is subject to maximum withdrawal limits)
• They depleted non-registered funds first (gifts to kids, plus the first vehicle replacement), and their TFSAs were only tapped as needed for additional travel and the second vehicle replacement

It was a significant improvement versus the bank advisor’s plan. Like, incredibly significant.

• They paid $155,442 less in lifetime personal taxes in the optimized plan
• They claimed $850,446 more in lifetime CPP and OAS benefits in the optimized plan
• They paid zero tax in their estate due to depleting the RRIFs and LIF before death (versus paying $273,432 in tax in their estate in the bank advisor’s plan)
• Their after-tax estate was worth $1.48M more in the optimized advice-only planner’s plan

Not content to simply leave the Meltdowns with a giant estate at age 95, the advice-only planner suggested the possibility of increasing spending by an additional $12,000 per year throughout retirement for their plan to equal the final estate indicated in the bank advisor’s plan.

Final Thoughts

Banks have often treated financial plans as a freebie for their clients. The result is a cookie-cutter projection that treats every client scenario the same. You’re likely to see the uptake of CPP at 60, RRIF withdrawals no earlier than 72, and little thought to optimizing taxes year-over-year.

Basically, as long as the numbers look good and the charts point in the right direction with no glaring shortfalls, you’re “good”.

Meanwhile, an advice-only planner is going to take a more detailed and thoughtful approach to your retirement decumulation plan.

The goal is to help you meet your retirement spending needs, including lumpier one-time expenses (gifts, renos, vehicle replacement) in the most tax efficient way possible, given your available resources.

The difference between a bank advisor’s plan and an optimized retirement plan prepared by an advice-only planner may not be as stark as this example ($1.4M excess at death, or an extra $12,000 per year in retirement spending), but wouldn’t it be worth a few thousand dollars for you to find out?

*By the way, this plan does not even include the potential savings in investment fees if Mark & Mindy decide to leave their bank advisor and manage their own investments using low cost index funds…something an advice-only planner might be able to assist them with 😉