One of the challenges of the privacy laws and the current regulatory system is the bias for spouses to invest on an individual basis, not for spouses investing together. I’ve written in the past about how this is causing all investing to look the same.
When a couple goes in to buy RRSPs, the financial institution must set up separate accounts and acknowledge the separate risk tolerances, time horizons and investment objectives for each spouse. Although you might expect that spouses will get two different and unique portfolios, many couples are walking out with extremely similar portfolios.
Although there can be benefits of spouses having individual portfolios to reflect unique wants and needs, there are also situations where spouses can benefit from working together to maximize tax efficiency and minimize risk. Here’s a great example of a couple working together as a team.
Rick and Cyndi working together on their investments
Rick and Cyndi are in their late 50’s and getting ready for retirement in a few years. They have lived in what I will call the traditional relationship where Rick was the primary income earner and Cyndi stayed at home to raise their three children. Cyndi entered the workforce much later in life after staying home to raise the kids.
When looking at their retirement assets, Rick has an excellent defined benefit pension and over $200,000 in his RRSPs. Cyndi has no pension and only $60,000 in her RRSPs. They will both qualify for Old Age Security (OAS) as well as Canada Pension (CPP) but Rick will get more CPP than Cyndi.
Conservative or aggressive?
When it comes to investing, Rick is by nature more aggressive. He likes to play the stock market a little and there have been times he has done quite well. Cyndi is more conservative because she feels she has so much less than Rick and needs to keep it safe. As a result, his portfolio is much more aggressive.
Although Rick has a higher tolerance for risk, one might argue that he does not need to take more risks when investing. In other words, there is s difference between how much risk Rick wants to take and how much risk he needs to take. I call this the difference between his risk tolerance and risk capacity.
Rick and Cyndi feel they can easily live off the Pensions and government benefits alone in retirement. That means the RRSPs are ‘extra’ and Rick does not need to take any risks in his RRSPs. Even if Rick, theoretically, put all his RRSPs in a sock drawer with no interest, they should still be able to enjoy their retirement because of Rick’s work pension, their CPP and OAS.
Growth can cause tax problems
One of the challenges that Rick potentially has with having a good pension is that he may find it difficult to get the RRSPs out in a lower tax bracket in retirement. Even with some of the pension splitting opportunities in retirement, some future income projections show that Rick will be in the 32% marginal tax rate (MTR) for any RRSP withdrawals in retirement. If he continues investing for growth, the RRSPs could potentially become a bigger tax burden at higher levels in the future. Cyndi, on the other hand, has a lot of room at the lower levels (25% MTR) to get RRSPs out at the lower marginal tax rates.
In fact, when you look at the bigger picture, there may be advantages in keeping Rick’s portfolio more conservative and Cyndi’s portfolio more aggressive, which is the opposite of what risk tolerance suggests. Since higher rates of return in Rick’s portfolio could actually mean more tax in retirement, putting the higher risk investments in Cyndi’s name is better because higher growth rates does not mean more tax for Cyndi because she has more wiggle room to get the RRSPs out in the lower tax 25% bracket.
Overall, from a tax and risk perspective, Rick and Cyndi are better off working as a team on their investments. Rick should invest his RRSPs more conservatively, while Cyndi puts all the growth oriented investments into her RRSP. Overall, they might target the same balance between stocks, bonds and cash but instead of balancing the mix within each of their RRSP accounts to reflect their individual needs, Rick might be loaded with the safer investments and Cyndi’s with the growth investments.
Utilizing other accounts like the Tax Free Savings Accounts (TFSA) is another great place for Rick and Cyndi to invest in higher growth investments because there will be no tax on the growth.
There are many examples and strategies where couples can implement good financial strategies together like spousal RRSPs, income splitting, and cashflow strategies but don’t lose sight of the merits of working together when it comes to investing as well. Good planning makes all the difference.