Retirement money and estate money tend to be stored in many silos. Containers if you like. Some containers automatically create bad money.
Common containers are:
- a business or holding company
- Pension Plan
- Government plans
- Investments inside a tax free savings account
- Investments outside a tax free saving account
- Life insurance policies
As you approach retirement, and certainly afterwards, you will make a decision about how to access cash for living. Not everyone gets it right. You spend cash and you need to remember that when you spend money to live, the money cannot tell where it comes from.
Note: Cash and income are not the same thing and you will harm your result if you try to equate them.
Try thinking about money as good or bad or somewhere in between.
Good money is worth 100 cents on the dollar. Bad money is worth much less. Like an RRSP in your estate is worth roughly 50 cents on the dollar once taxes are paid.
Good money has no restrictions. Bad money has restrictions. Like a pension. You must be alive to get it. Tough restriction.
The smarter move for some, you can analyze where you fit, is to decide to spend the bad money first. For many that runs against the grain. We have been taught not to touch the principal. Take the income off but keep the principal intact.
That is not a bad rule, it is just too narrow and frequently poor advice in retirement
Consider an RRSP or RRIF. As I grow older would it not make more sense to spend RRIF money more quickly than necessary. Pay 35 or 40 cents in tax now or defer it as long as possible and pay 50 cents in the estate. By spending it more quickly I could let other investments grow more than they would if I took the income away. A TFSA especially matters in this context.
Investments that generate capital gains matter. A capital gain in a regular investment account will cost less than 25 cents on the dollar in my estate. The same capital gain in a RRIF will cost nearly 50 cents. That is an often overlooked asset allocation problem.
Life insurance policies provide tax paid capital at death. It is usually attractive financially to let money grow within while you access your cost of living from another source.
There is a long standing general law in economics that deals with this question.
The theory holding that if two kinds of money in circulation have the same denominational value but different intrinsic values, the money with higher intrinsic value will be hoarded and eventually driven out of circulation by the money with lesser intrinsic value.
You will have more money if you hoard the good money and spend the bad money.
Some are uninterested in increasing their estate, but if it costs you nothing to do so, why not? On the other side, a bigger estate the day after death is bigger security the day before death and security is not such a bad idea.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.