Consider it a nice problem to have. After decades of saving and being careful and watching your pennies, you’ve accumulated a nice big fat nest egg. Now what?
First, do make sure it is indeed enough. In a recent Wall Street Journal column, investment advisor and author William Bernstein recommended calculating your “RLE” – residual living expenses. This is an estimate of your annual living expenses, plus any taxes you’ll owe on withdrawals from your retirement accounts, minus the money you’ll receive from any government or workplace pensions.
Then you must factor how long your money must last. For example, if you need $25,000 on top of your pension for 30 years, that requires a $750,000 nest egg, just living off the principal.
Ideally though, you will live off the income of your investments rather than the principal. In the Financial Post, certified financial planner, Jason Heath, provided a few scenarios: To generate $25,000 per year in income, for example, you’ll need a $1 million investment portfolio generating 2.5% in dividends and interest.
Now. If you’ve dutifully done your math and are certain you’ve got more than enough, it’s wise to consider a safety-first approach. From the Wall Street Journal:
“…if you reach your particular savings goal, Mr. Bernstein recommends the bulk of your portfolio should be invested in relatively safe holdings, such as bonds, Treasury inflation-protected securities and inflation-adjusted immediate annuities. Think about it this way, he suggests: If you have saved and invested well, it’s possible you have “won” the game; you have built the nest egg you need. And if that’s the case, stop playing. In other words, start reducing the risk in your savings.”
If you’re fortunate to have accumulated more than you reckon you’ll spend in your lifetime, note that registered savings plans such as RRSP or RRIFs can be left to a spouse on a tax-deferred basis, but without that advantage, it gets costly. Heath warns that, “a $500,000 RRSP or RRIF left to a non-spouse beneficiary, such as one’s children, could be subject to between 38 per cent and 54 per cent tax, depending on the province or territory of residence.”
Therefore, from a tax perspective, it’s always helpful to have a spouse to leave things to. Spouses or children may be named as joint owners of certain assets to keep them out of the estate and make an executors’ job easier. Charities can even be named as full or partial beneficiaries of RRSPs and RRIFs, which could be a win/win scenario in terms of mitigating estate tax and helping others. In any case, its highly advisable to see a tax and estate planner to help guide you through your options and the tax implications.
Beyond the tax strategies, giving generously to kids, grandkids, loved ones and charities – during one’s lifetime – is perhaps one of the most rewarding benefits of a life well lived and a nest egg well saved.
Finally, there is always the possibility – and this is radical – of spending it. You’ve earned it and you deserve to enjoy it. Die broke, as they say.