Economic trends and market uncertainty – punctuated by rising interest rates and inflation, and the prospect of a potential recession – have put Canadians on edge.
For investors nearing retirement, these conditions are also raising questions about their short- and long-term futures, and what they should be doing to ensure the post-work lifestyles they’ve envisioned.
“What we’re facing right now is economic turmoil that’s leading people to question if they’ve saved enough and will they be able to do the things they want to do in retirement,” says Tony Maiorino, vice-president and director, head of RBC Wealth Management Family Office Services. “This is affecting all Canadians at both ends of the income and wealth spectrum, and people are understandably worried.”
A holistic wealth plan can help ease these concerns by mapping out strategies designed to optimize investments, reduce tax liabilities and buffer the impact of volatile markets.
“If you’re retiring today or are just a few years away from retirement, you definitely need to sit down with your advisor to make sure you’re making the best possible decisions based on your short- and long-term objectives,” Mr. Maiorino says.
The most effective wealth plans are built on strategies that take advantage of all available opportunities to achieve particular goals – whether it’s to drive growth in a portfolio, preserve capital, minimize taxes, or leave a legacy through charitable giving.
At RBC Wealth Management, Mr. Maiorino says, this means bringing the right team of professionals to the table to analyze a client’s particular circumstances and come up with optimal solutions.
For example, investors concerned about securities that have lost value in recent months might have their RBC advisor and tax specialist work together to model several alternatives.
“These options might include taking that reduction in value and using it now to offset taxes from capital gains in the current year or possibly carryback unused losses to offset gains in the last three years. If you’re planning to sell your cottage next year you can bank that loss and any loss not claimed this year can be used next year against the capital gain from the cottage,” Mr. Maiorino says. “Or maybe your advisor will recommend that you hang on to those securities because they’re good companies and their values will likely go back up again.”
For Canadians facing imminent retirement, a key challenge today may arise from a need to liquidate some of their investments. “We usually recommend that you start to build up a cash reserve from between 12 to 24 months leading up to retirement,” Mr. Maiorino says. “That can be tricky when there’s a decline in the market.”
The first course of action for these soon-to-retire investors should be a discussion with their advisor on where to draw income from at particular stages of pre-retirement and during retirement. These discussions could yield strategies for income-splitting between spouses, or for early payouts from the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), depending on each individual’s unique financial circumstance.
“There isn’t a one-sized shoe that fits everyone,” Mr. Maiorino says. “When it comes to taking CPP or QPP early, we look at your individual situation: how much do you have in your RRSP, TFSA and non-registered investments, and what are the things you’re planning to do in retirement? Then we’ll work through calculations to see if it’s better to take CPP or QPP now or defer it.”
These calculations might also be informed by potential scenarios, such as a client putting off retirement for a couple of years.
When an investor’s assets include an operating company, your RBC advisor will bring in experts in corporate tax and business structures to analyze and identify opportunities to take advantage of current economic and market conditions.
“If the business owner has done an estate freeze – which basically transfers the future increase of shares in the business typically to the owner’s children either directly or through a family trust – is there an opportunity to redo that freeze at a lower value, thereby lowering the client’s tax liability at death?” Mr. Maiorino asks. “Another tax benefit of an estate freeze is to multiply the lifetime capital gains exemptions of $913,630 (the 2022 value) with family members on a future share sale.”
For retirement-age clients who plan to pass on some of their wealth to a charity after they die, it may make sense to give that gift today to generate a tax benefit. Working with an RBC advisor and philanthropy specialist, clients can consider the scenarios that best align with their retirement and charitable giving goals.
“If you’ve decided you want to sell your cottage because you plan to travel more in retirement, making that charitable donation today could effectively cancel out the tax you’d need to pay on your capital gain,” Mr. Maiorino says. “These are the types of situations where our clients can really leverage our Family Office Services team. They’ll get access to sophisticated guidance from our tax specialists, charitable giving experts, business succession specialists, estate planners and, of course, financial planners.”
A common concern right now, says Mr. Maiorino, is whether wealth plans created five or 10 years ago can still deliver, given the upward trends for inflation and interest rates. Some investors are also worried that the life expectancy assumed in their wealth plans may need to be adjusted to reflect the fact that Canadians are living longer.
“All our plans are forward-looking and have been stress-tested to account for today’s conditions,” Mr. Maiorino says. “But for clients who are looking to re-evaluate their plan, part of our conversation with them will be focused on stress-testing their portfolios against factors like higher inflation and interest rates, and longer retirement.”
While wealth planning is critical when economies and markets are in turmoil, they’re just as valuable when times are good, he adds.
“Knowledge is power, and the more clients can understand the possible outcomes relative to their circumstances, the more they can make the best decisions. That’s the value of a holistic wealth plan created by a team of great advisors.”
This article was originally published in The Globe and Mail.
The strategies, advice and technical content in this publication are provided for the general information only and benefit of our clients. This publication is not intended to provide specific financial, investment, tax, legal, accounting or other advice for you, and should not be relied upon in that regard. Readers should consult their own professional advisor when planning to implement a strategy to ensure that individual circumstances have been considered properly and it is based on the latest available information.
RBC Dominion Securities Inc.*, RBC Phillips, Hager & North Investment Counsel Inc., RBC Global Asset Management Inc., Royal Trust Corporation of Canada and The Royal Trust Company are collectively, the “Companies”, and member companies of RBC Wealth Management, a business segment of Royal Bank of Canada. *Member – Canada Investor Protection Fund. Each of the Companies and Royal Bank of Canada are separate corporate entities which are affiliated. The information provided in this article should only be used in conjunction with a discussion with a qualified professional advisor when planning to implement a strategy. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. ©2022 Royal Bank of Canada. All rights reserved.
This article may contain strategies, not all of which will apply to your particular financial circumstances. The information in this article is not intended to provide legal, tax or insurance advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax, legal and/or insurance advisor before acting on any of the information in this article.