Do retirees need life insurance?

Your income description is suggesting you have about $300,000 of non-registered investments yielding 4%, a small $20,000 life income fund (LIF), and indexed pensions of about $40,000 each. You’re drawing about $20,000 each from your registered retirement savings plans (RRSPs) to bring your income to about $90,000, just below the entry point to the Old Age Security (OAS) clawback zone. This puts your total after-tax annual income at about $135,000.

Questions and talking points with a financial planner

Here are eight things to consider and/or discuss with your financial planner:

1. Once you have more money than you will ever spend, it’s time to start thinking in terms of a family unit rather than as a couple. If you and your wife have maximized all your tax shelters, consider adding to your children’s tax shelters, such as RRSPs, tax-free savings accounts (TFSAs), first-home savings accounts (FHSAs), and mortgage on the principal residence. 
2. When it comes to drawing extra from your RRSP and/or registered retirement income fund (RRIF), the longer life you live, which is unknown, the less sense it makes. To see this, I modelled two solutions below with you drawing an extra $40,000 from your RRSP and investing the after-tax amount in your non-registered account versus not drawing the $40,000 extra. These are my findings if you pass at these ages:
   • Age 82 and 83, you will leave $40,000 more to your children and pay $100,000 less in tax in your estate.
   • Age 90 and 91, you will leave $20,000 more to your children and pay $20,000 less tax in your estate.
   As you can see, the longer you live, the less effective it is to draw more than needed from your RRIF. Also, in both cases the difference between drawing the extra and investing versus not drawing extra is very small over 16 and 24 years.
3. Transfer your LIF to an RRSP or RRIF, if it is eligible to be unlocked under the small amount provision. 
4. Consider converting your RRSP (or a portion of it) into a RRIF. Only convert an amount where the required minimum withdrawal is not larger than what you want to draw. There are two benefits to RRIF withdrawals that may or may not be applicable to you: pension splitting eligibility and optional withholding tax on minimum withdrawals starting in the calendar year after opening the RRIF.
5. If you’re working with an advisor charging fees, ask to have the fees for your RRSP and TFSA drawn from the LIF. If you are moving your LIF to an RRSP or RRIF, have your TFSA fees drawn from one of those accounts. Fees withdrawn from an RRSP or RRIF come out tax-free, and you will be leaving more money in your TFSA to grow and compound. 
   This might get you thinking that it would be a good idea to have all fees paid by your non-registered account so you can deduct the fees from your income. Don’t do this. You cannot deduct RRSP/RRIF fees if they are paid by a non-registered account. Also, if you’re already deducting fees on your non-registered account, it will cause you confusion as you try to separate non-registered investment fees from RRSP fees. 
6. You didn’t mention a TFSA, but I assume you have one. If not, consider moving any non-registered money into a TFSA, keeping an eye on the capital gains tax you might owe. 
7. Spend more money. Financial planner and host of The Humans vs Retirement Podcast Dan Haylett has this expression, warning people dying with too much money: “You’re trading memories for money.” If you want to reduce taxes in your estate, spend and/or gift your money along the way—and have fun doing it. 
8. Have you considered donating money to a charity? This handy calculator from CanadaHelps can show what your tax savings will be based on the amount you give to charity. 

What about using life insurance?

I mention life insurance because you expressed a concern about your kids losing 50% of your RRIF to taxes when you pass. Life insurance is a “family first” investment you can use if you want to add some guarantees to your estate plan. 

I modelled a permanent life insurance policy (universal, $500,000, minimum funded, annual renewal to age 90), with premiums starting at $4,067 a year increasing to $30,089. It stops at age 90. These were the results with the insurance if you pass at these ages:

1. Ages 90 and 91, you will leave $5,000 more to your children and pay $20,000 less in tax in your estate.
2. Ages 81 and 82, you will leave $300,000 more to your children and pay $7,000 less tax in your estate.

The longer you live, the smaller the insurance benefit will be. Age 91 is about the crossover point in value, if your investments are earning a 5% annual return. The higher return, the less effective the insurance over time. And the lower the return, the more effective the insurance. I don’t know of any free software that will help you determine the best withdrawal strategy, and I’m not convinced there’s one best strategy over a 24 year period to age 91. Things change over time. Look at several different withdrawal strategies so you get a sense of the differences and then keep testing year to year. To do this, I use a program called Visionworks from Vision Systems Corp.

Read more about retirement planning and life insurance:

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.