Investors often look to rules of thumb or mental shortcuts to help guide their decision making. Unfortunately, there aren’t many good rules of thumb that can help determine how much you will spend in retirement.

The 4% safe withdrawal rule, while a decent starting point, is not particularly useful. For one, investors don’t just have one pot of money labeled ‘retirement income’ that they draw from. We have RRSPs and RRIFs, LIRAs and LIFs, TFSAs, and non-registered savings and investments, each with different withdrawal rules and taxation. We may also have pension income, along with CPP and OAS benefits, to consider.

On top of that, life doesn’t just move in a straight line. We often have lumpy one-time expenses such as buying a new vehicle, renovating our home, gifting money to children, and spending on bucket list experiences throughout retirement.

It’s also the sequence of withdrawals that matters – how all of those puzzle pieces fit together over the years to create a tax efficient retirement income for your lifetime. That means a strategy of targeting a specific number, say $1M, in savings and investments and expecting that will pay you exactly $40,000 per year (rising with inflation annually) might fail to meet your spending needs in retirement.

Then there’s the percentage of income rule for retirement income – commonly cited as 70% of your final average pay. This rule assumes you’re no longer saving for retirement, kids have moved out of the house, and the mortgage is paid off. But what about single Canadians? Couples with no children? Lifelong renters?

Retirees who had a high savings rate throughout their careers may only spend 40-50% of their final average pay in retirement to maintain their standard of living. That’s because they may have saved 20% or more of their income, paid a high average tax rate, and don’t carry any debt. Assume they’re no longer saving, paying off their mortgage, spending on their children, and can benefit from income splitting and overall lower tax rates in retirement.

On the other hand, lower income earners who are lifelong renters may not have been able to save as much throughout their careers, but could easily spend 80% or more of their final average salary simply to maintain their current standard of living. Their tax rate may not change that much, so aside from no longer paying into CPP/EI their expenses would largely be the same. 

Finally, you’ll need to consider your human capital and how long you plan to earn an income from employment (either full-time or part-time as you ease into retirement). 

All of these nuances mean it’s essential to have a retirement plan – one that looks at your unique circumstances and doesn’t blindly follow rules of thumb.

I can say after working with hundreds of retirees it’s clear that the best predictor of your future spending is what you’re currently spending. Indeed, most of my retired clients want to maintain their existing standard of living, if not enhance it slightly for extra spending on travel and hobbies. An added bonus is if they can have a pot of money left untouched for unplanned spending shocks, one-time expenses, and healthcare challenges (often the TFSA, but mostly it’s their untapped home equity).

Another useful tidbit I’ve noticed is that for most retirees who have the ability to significantly increase their lifestyle, many just cannot bring themselves to do it. Call it a scarcity mindset, or just decades of practiced frugality, but it’s almost impossible to turn the spending taps on full blast after a lifetime of saving.

That’s useful because for those in their savings years now, thinking they’ll live on less today in order to live large tomorrow, it’s unlikely they’ll actually be able to bring themselves to do it. Better to allow yourself some lifestyle creep now and throughout your career so you can enjoy the journey.

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Weekend Reading:

On the topic of saving for retirement, Fred Vettese shows how hard it is for regular Canadians to save enough to retire at age 60.

A Wealth of Common Sense blogger Ben Carlson explains why you probably need less money than you think for retirement.

PWL Capital’s Ben Felix explains why cash, even at 5%, is extremely risky for long-term investors:

If you’ve been using (or thinking about using) one of the Horizons’ all-in-one ETFs in a taxable account to avoid annual investment income, note these important changes to their funds. They’ll now look more like the Vanguard, BMO, and iShares’ versions and pay taxable income.

What are the world’s best performing stock market indexes right now? Andrew Hallam shares why you don’t want to chase the latest winners.

The always brilliant Morgan Housel compares the difference between intelligent and smart.

Fee-only financial planner Anita Bruinsma has a thoughtful post on managing our weaknesses.

If the media covered elevators like they cover the stock market, they’d re-name the up and down buttons as “soar” and “plunge”. Here’s Preet Banerjee on why we, and the media, have a fascination with market bears and their predictions:

You might be surprised by these reporting requirements – and tax breaks – on your interest-bearing investments like bonds and GICs.

Why do these investors want their portfolios to drop?

“Steve owns a globally diversified portfolio of index funds. For him, market drops are like low ocean tides. They are temporary. But they allow him to scoop additional ownership in thousands of companies with a lot less effort. It’s like plucking salmon or tuna from low tidal pools.”

Why everything and everyone underperforms, eventually.

Looking for travel deals? If you’re flexible on when or where you go, these tools can help.

Why couples should consider co-mingling their finances. Research shows that couples who merge their money are more likely to be happy and successful.

A good summary by Cullen Roche on the future of inflation and interest rates.

Finally, is this the most unaffordable time ever to buy a house? Not according to one metric (subs).

Have a great weekend, everyone!

Some of my younger clients are concerned they might be over-saving. I think they might be onto something. 

I have the unique perspective of having written hundreds of retirement plans over the last eight years. One common theme is that retirees who had a high savings rate throughout their careers are rarely able to flip the switch from savings mode to spending mode.

Imagine you spent $50,000 per year after-taxes during your working years, while consistently saving 25-30% (or more) of your income. In retirement, it becomes clear you can safely spend up to $100,000 per year without ever worrying about running out of money.

Could you do it? Could you double your spending in retirement and enjoy the fruits of your labour? I’d argue most can’t (or won’t).

What if, instead of spending $50,000 per year throughout your working years for the chance of spending up to $100,000 per year in retirement, you spent $75,000 per year throughout your entire lifetime (adjusting annually for inflation)?

Economists call this consumption smoothing. I call it maximizing your life enjoyment.

Think about it. You save and invest for the future, but when it comes time to spend the money you can’t bring yourself to do it. You’ve never exercised your spending muscles.

Instead of living your dream retirement you continue saving, maxing out your TFSA annually and taking your minimum RRIF withdrawals and putting the money into a non-registered account (just in case).

My younger clients are starting to see this happen with their own parents. Heck, my older clients know it happened with their own parents.

How do you know you’re over-saving? A big clue is if you’ve maxed out your registered accounts and start asking, “what’s next?” with your extra cash flow. 

Instead of blindly shovelling money into a taxable account with no purpose, consider increasing your spending on one or two categories that are important to you. Start exercising those muscles so that when you get to retirement you’re not sitting there with millions of dollars asking, “what’s next?”.

I’m far from a YOLO practitioner. We need to strike the right balance between spending now and saving for the future. But the future is never promised.

If you have the means to enhance your life enjoyment while still saving a reasonable amount for retirement, I say go for it. 

After all, my anecdotal evidence suggests you probably won’t increase your lifestyle spending in retirement anyway (you certainly won’t double it). A modest increase in spending now, sustained throughout your lifetime, can lead to better overall life satisfaction.

This Week’s Recap:

This is the longest I’ve gone without updating the blog, but we’ve been away travelling for the past few weeks. Our third trip to Scotland was absolute magic. We spent four nights in Edinburgh, five nights in Fort Augustus, and another two nights in Glasgow. 

We rented a car in Stirling so we could drive through the Scottish Highlands and out to the Isle of Skye. We lucked out with some incredible weather on Skye, and enjoyed our stay at the south edge of Loch Ness.

Before our travels, we shared a monster post on probate, including how to avoid or reduce probate fees and whether you should even try.

Many thanks to Erica Alini for including that post in her Carrick on Money round-up.

Weekend Reading:

Morningstar’s Christine Benz on her failings as an investor – do as I say, not as I do.

PWL Capital’s Ben Felix answers the question, will more money make me happier?

Reddit’s Personal Finance Canada community offered advice on whether it makes sense to pay down a mortgage earlier, especially with high interest rates.

High interest rates mean the new normal in vehicle buying is a monthly payment in the $1,000 range. Gross.

Single and stressed? Squawkfox Kerry Taylor offers financial advice when flying solo.

Why the best days are ahead.

Cullen Roche explains why 2023 is the year that gives everyone a narrative.

Retirement without home ownership is possible. Financial advisers explain how to get started.

Financial planners tend to use inflation or inflation + 1% when projected future wage growth. That’s not quite right. PWL Capital’s Jordan Tarasoff looks at how Canadian incomes change with age.

A look at the return on hassle spectrum when it comes to investing. Count me as a hands-off, no hassle type of investor.

Ben Felix explains structured notes and says when you’re having dinner with lions make sure you’re at the table and not on the menu. Point taken:

My Own Advisor Mark Seed says to watch out for RRSP / RRIF taxation.

Norm Rothery catches up with the retirement class of 2000 (subs).

Michael Batnick on the cruel irony of investing:

Investors: “The market feels risky right now. I’ll just park my money in this high-yield savings account earning 5% and wait for the dust to settle.”

Stock market: LOL

A Wealth of Common Sense blogger Ben Carlson says everyone has their own money trauma.

The Evidence Based Investor asks, do you have enough money already?

Finally, Jaclyn Cecereu does a terrific job breaking down CPP contributions and benefits.

Enjoy the rest of your weekend, everyone!

Some Canadians will go to great lengths to avoid probate fees and to reduce taxes applied to their estate. Indeed, estate planning strategies such as adding an adult child to the title of primary residence or a cottage, or as a joint owner of a non-registered account, can unknowingly expose you or your child to potential costs and unnecessary risks.

Before you tie yourself in knots trying to avoid probate fees, let’s answer some important questions about what exactly probate is, which assets are subject to probate, and what you can do, if anything, to reduce or avoid them.

We’ll also look at what people get wrong about probate, along with the potential pitfalls that can be caused trying to avoid probate – at the expense of good tax, financial, and estate planning.

Estate planning is a complicated topic, so I sought the help of three of the brightest minds I know in financial planning to put together a comprehensive article on the subject; Mark McGrath, an investment advisor in Squamish, Markus Muhs, a portfolio manager in Edmonton, and Jason Pereira, a financial planner in Toronto.

What are probate fees?

First up, here’s a Q&A with Mark McGrath to help explain what probate fees are all about.

Q: Which assets are subject to probate fees?

A: When an asset is left to your estate, it may be subject to probate.

Certain assets that allow you to name a beneficiary may pass outside your estate – for example, RRSPs, TFSAs, and life insurance policies where you’ve named an individual as the beneficiary.

If assets are held in joint tenancy with rights of survivorship, or owned by a trust, they may bypass probate as well.

Other assets like personal non-registered accounts, bank accounts, personal effects, or real estate do not allow you to name a beneficiary, so in many cases those assets will be part of your estate.

Each province has its own probate fees and thresholds. In Ontario for example, where probate fees are now known as ‘estate administration tax’, that threshold is $50,000. Only amounts above this threshold are subject to probate fees.

It’s worth noting that while assets can pass to your surviving spouse without tax, that doesn’t mean the asset won’t form part of your estate.

If you own a non-registered account in only your name for example, this can be rolled over to your surviving spouse at cost, meaning any unrealized capital gains can be deferred until the death of the survivor. But that account would still be part of your estate, and subject to probate fees.

Unintended consequences

Q: What do people get wrong about probate?

A: Probate is an important process in winding up an estate. It validates that your will is current and indemnifies people and institutions that hold your property from giving it out to the wrong beneficiaries.

Often, planning is done with the intention to avoid probate fees. And often, that planning has unintended consequences.

For example, adding an adult child as a joint owner on your bank account is advertised as a way to allow the bank account to pass to the surviving owner, outside of the estate. But it’s not that simple – adding a signer to an account might trigger resulting trust rules, where the asset is deemed to be held in trust for the estate.

In certain cases, adding a joint owner will be a disposition for tax purposes. That means if you add a joint owner, like an adult child, to any property that has increased in value – you may be subject to capital gains taxes on a portion of the increased value.

I also see people leaving their RRSPs to their adult kids rather than the estate to avoid the probate fees, but without realizing that the beneficiaries and/or the executor could be on the hook for the tax bill. Sometimes it could be best to leave the RRSPs to the estate to avoid this issue, even if it means probate fees will be charged.

Probate fees range from nil in some provinces, to a high of 1.695% in Nova Scotia. Going to absurd lengths to eliminate a relatively small fee could cause more problems than it’s worth.   

How to reduce probate fees

Q: So, what can people do to help reduce probate fees?

A: Where appropriate, name individuals as beneficiaries on allowable accounts – RRSPs, TFSAs, and life insurance policies for example. But be aware that naming beneficiaries can have unintended consequences, like a disproportionate inheritance for certain beneficiaries.

For higher-net-worth Canadians, using trusts may be appropriate. These are complex structures that come with other costs, but assets held in trusts generally do not go to your estate and are therefore not subject to probate.

Gift money while you’re still alive. There is no gift tax in Canada, though gifting money to a spouse can have tax consequences. Gifting to adult children who are beneficiaries of your estate keeps that money away from probate and allows you to see your heirs benefit from the gift while you’re still alive.

Add joint owners to your assets, but seek professional advice first. There can be adverse tax consequences if not done correctly, or the assets may still pass to your estate.

Seek professional help. Estate law is complex and can vary by province. While it may seem costly, hiring a good estate lawyer will often pay for itself in the long run.

Probate fees in dollar terms

Q: Finally, can you give a short example of a final estate and what the probate fees would be in dollar terms?

A: Sure. Frank and Jane own the follow assets in Ontario, BC:

	Frank	Jane
RRSP	$100,000	$200,000
TFSA	$120,000	$100,000
Joint non-registered	$50,000	$50,000
Personal non-registered	$150,000	$70,000
Vehicles and personal items	$40,000	$40,000
Life insurance policies	$500,000	$500,000

They have named each other as the beneficiaries on their RRSPs, TFSAs, and life insurance. And their joint non-registered investment account is a result of each of them saving and contributing to the account – it is owned as joint tenants with rights of survivorship.

Frank passes away. What assets are subject to probate, and what are the costs?

The RRSPs, TFSAs, and life insurance death benefit go directly to Jane, bypassing Frank’s estate. Since she is a joint owner on the non-registered account, that passes to her directly as well – no probate.

Frank’s personal non-registered account and his vehicles and personal items, however, do form part of his estate, since he was unable to name a beneficiary on this property and it was owned only in his name.

The total value of those assets is $190,000, exceeding the probate threshold in Ontario of $50,000.

The amount above that threshold – $140,000 – is subject to Ontario probate fees, which are 1.50%.

$140,000 x 1.50% = $2,100 in probate fees.

Nobody likes to pay fees if they can be avoided. But engaging in complex planning to avoid $2,100 in fees may not have been worth the cost and complexity involved.

Thanks to Mark McGrath for explaining in plain language what exactly probate is, walking through how to reduce or avoid fees, and for giving us a clear example of what those fees might look like in dollar terms. Be sure to follow Mark on Twitter.

Common questions about avoiding probate

Now that we have a good overview of what probate is, which assets are subject to probate fees, and what people can do to reduce or avoid probate fees, let’s get into some common questions that financial planners hear from their clients about avoiding probate.

Here’s my Q&A with Markus Muhs on this topic.

Adding child(ren) as joint owners of a non-registered account

Q: Markus, my first question for you is about adding your child(ren) as joint owner of a non-registered account. What do people hope to accomplish with this? What do they get wrong about it? What can they do instead?

A: First and foremost, I need to disclose that I’m not a legal expert, and with a lot of these big ticket decisions your readers should consult with a lawyer specializing in wills and estates before going forward with any particular strategy.

Spend the money on professional legal advice, even if it’s a few thousand dollars, to avoid losing thousands to inefficient taxation of your estate—or worse—litigation, should your beneficiaries fight about it.

With that out of the way, in most provinces (outside of Alberta and Quebec) probate fees are applied on an estate as a percentage of assets. It varies province to province, but usually there’s a small or flat rate applied to a smaller estate, or the first portion of a bigger estate, then a fairly punitive amount to larger estates.

In Alberta and Quebec it’s a flat 3-figure dollar amount to cover the administration of probate, while in other provinces it’s unofficially an estate tax.

With that said we’re not talking anything huge, like the estate taxes in some other countries. The province of BC, for example, applies no fee to the first $25,000, 0.6% to the next $25,000, 1.4% for the excess.

Probate fees on a $1 million estate would then come out to slightly under $14,000. That sounds like a lot, but when you’re also considering the taxes due on remaining assets in RRSPs/RRIFs, capital gains, and other legal costs that could come up, it’s not really.

“Most Canadians would be better served applying more thought to a tax-smart decumulation strategy (what we financial planners help them accomplish) than worrying about probate fees.”

Probate fees become more of an issue for single people, typically the last-to-die spouse. When the first spouse dies, there generally isn’t much of an estate to be probated, as most assets pass with joint right of survivorship to the surviving spouse, while registered plans pass tax-free or tax-deferred to the survivor.

So, after that first spouse has passed the widowed parent (or their children) often debate making assets joint in order to bypass probate.

Some things that can go wrong with this:

For bank accounts, it might not be clear that the purpose is for the account to pass to the child upon death of the parent.

The standard procedure when making an account joint at a bank is to have the account holders sign a joint signature card. If there isn’t an explicit joint with right of survivorship agreement signed by all account holders and properly witnessed, the account might not pass to the survivor.

This means upon death the account gets frozen along with the deceased’s other accounts, and the bank considers it part of their estate.

For investment accounts, there could potentially be litigation issues if a large account is left joint with right of survivorship to one child and other children are left out.

“It may not always be clear whether an account was made joint for administrative purposes, or estate purposes.”

Adding your child(ren) to the title of your primary residence

Q: What about adding your child(ren) to the title of your primary residence?

A: It’s one of the most common questions, as the primary residence is usually the largest asset left behind by the parent.

A primary residence for an individual or married/common-law couple is exempt from capital gains taxes, so a parents’ home is exempt, and a child’s primary residence is exempt.

If the child is put as joint owner on the parent’s home, the parent’s 50% ownership of the home remains tax exempt (and capital gains up to that point is of course exempt), but the child then partially owns a second property, and that share of the property is not exempt.

Let’s say a $1 million property goes up in value by $200K from the point it was made joint to when the parent passes away: $100,000 of that capital gain is the child’s, and half of it is taxed at their marginal tax rate. These taxes can easily become more than whatever probate fees were saved.

Q: So, what should a parent do instead?

A: In general, don’t make the primary residence joint with your child(ren). Expect it to flow through your estate and expect to pay probate fees on that.

Otherwise, if you plan on diverting from that path, only do so after consulting an estate planning lawyer – not because you read online that it’s a good idea or because a friend or family member suggested it.

Naming your child(ren) beneficiaries of your registered accounts

Q: What about adding your child(ren) as beneficiaries of your registered accounts?

A: This obviously makes a lot more sense for the surviving spouse, as it’s an easy way to bypass probate.

There are some pitfalls that might come up if an estate isn’t properly planned though.

Taxes can’t be avoided, and on RRSPs/RRIFs when kids are named beneficiaries of the plans, the full amount being withdrawn is taxable all at once in the deceased’s terminal tax return.

What trips up some people is the process in which such plans are collapsed: no tax is withheld; the full gross amount goes from the RRSP/RRIF to the beneficiary, so there needs to be other money left in the estate to pay the tax.

A common error that may come up is an example where the parent has a $1 million RRIF and net $1 million in other estate assets. They might think it’s simplest to name their son beneficiary of the RRIF while their daughter is named in the will as sole beneficiary of the estate.

Not only will the timing be way off on who gets what, and when (the son gets the RRIF money right away, as it doesn’t need to pass through probate, while the daughter waits upwards of a year for probate to pass), but the daughter in this case would be left with a tax bill (upwards of $500,000) for the RRIF withdrawal.

When a widowed parent names beneficiaries on their registered plans, the best practice is either to name multiple beneficiaries for their registered plans (splitting the money as the overall estate is intended to split) or just naming the estate. The latter will of course result in more probate fees in most provinces and take a lot longer till the beneficiaries get their money, but in certain cases can make for a cleaner splitting of assets and settlement of an estate.

Thanks so much to Markus Muhs for clearly answering these common questions about probate. Be sure to follow Markus on Twitter.

More probate pitfalls to consider

Next up we have Jason Pereira, who dives further into the potential risks involved when people try to avoid probate.

Q: Jason, what are some of the unintended consequences of adding your child(ren) to the title of your house, cottage, or non-registered account?

A: Moving accounts and real estate to joint ownership is a popular strategy with the masses for avoiding probate.

People do this because, when an asset or account is owned joint with the right of survivorship, the account will bypass the estate and the holdings will not be subject to probate.

The problem is, while simple to do, joint ownership opens up a minefield of potential issues.

First, people almost never get proper legal, tax, or financial advice before doing this – which can lead to many issues.

It helps to be aware of what probate even means. For most people, probate fees are tiny to non-existent.

“Yes, executing an estate can be a pain, but in many cases it’s better to pay probate to ensure your money goes where you want it to, and you can minimize or negate the chance of family conflict or abuse.”

Tax Implications

Q: What sort of tax implications do people need to consider?

A: By default, a change in ownership triggers taxation. As such, any deferred capital gains will be taxable when ownership changes.

Complexity

Q: What are some other issues that can arise?

A: In Canada, it is possible to legally separate beneficiaries from legal ownership. This means someone could be added as an owner, but NOT be the beneficiary of it. That would mean there is no disposition.

How to pull this off: you need documentation proving that the intent was just for probate reasons and is not a beneficial ownership change.

“RBC (and maybe others) now supports Joint Gift of Beneficial Right of Survivorship accounts that are designed for this.”

This type of arrangement constitutes a bare trust under the law and now requires disclosure of all parties and annual trust filings with CRA. Failure to comply will attract penalties.

Other risks to be aware of

1. This is not a way to split income. All income is taxable in the hands of the person who originally purchased the asset.
2. You also lose full control over the property. Now someone else has the right to decide how the asset is used.
3. The asset is now exposed to the liabilities of the new owner. If you add your child as joint owner and they have creditors come after them they will try to come after the asset. Note that reporting as a trust helps prevent and protect from this.
4. Family law issues. The asset is now exposed to the spouse of the new owner. Add your kid, and if they get divorced, the spouse could come after it. Again, reporting as a trust helps prevent and protect from this.
5. Estate issues. You can no longer control the distribution of that asset via a will. The asset is inherited by the joint owner, but the tax bill is the responsibility of the estate. If the will is not drafted accordingly, and there is more than enough money to pay the tax bill in the estate, then that joint owner could try to “screw over” the other beneficiaries by keeping the asset and sticking them with the bill. This likely wouldn’t hold up in court, but it could be tried. Never blindly trust people to do the right thing. There is a TON of case law on this.
6. Elder abuse issues: There is also a ton of case law where children that were added to joint accounts used the asset for personal use and made the original owner worse off.

Consider alternatives that are well documented, such as an Alter ego / Joint partner trust. And for crying out loud, get proper legal advice.

Thanks so much to Jason Pereira for shedding light on the many issues that may arise when you proactively attempt to avoid probate fees. Be sure to follow Jason on Twitter.

Final Thoughts

Many thanks again to Mark McGrath, Markus Muhs, and Jason Pereira for answering questions for this comprehensive article on probate fees and pitfalls to avoid.

It’s a complicated topic that gets brought up a lot, and there is a lot of misinformation floating around online and at the water cooler on how to avoid probate.

The key takeaways are that, in most cases, probate fees are minimal, and probate ensures the proper disbursement of your assets after you die.

There’s no need to tie yourself in knots trying to avoid probate fees if it means opening yourself and your child(ren) up to other potential issues.

If you do have a complicated estate or specific wishes you want carried out, get proper advice from an estate planning lawyer before you start adding children as joint owners and beneficiaries of assets and accounts.

That includes proper documentation declaring your intentions behind these actions. Don’t leave important matters up for interpretation.