Nick and Nora have worked hard over the years at his solo law practice, so they plan to hang up their hats next year and see the world while they're still in good health. They want to spend summers in Alberta and winters travelling.
He is 70, she is 63. Their business nets about $100,000 a year, of which Nick takes $65,000 and Nora, who is office manager, $35,000. They have a house outside of Edmonton and a condo in the city that serves as their office, both fully paid for. Their business will be closed rather than sold because it depends on their particular expertise.
While they have no company pension, Nick and Nora have saved enough money to maintain their comfortable lifestyle when they retire. Their main concern is shifting the savings in their registered retirement savings plans to registered retirement income funds - and ensuring the money lasts.
"How do we retire next year, convert to RRIFs, and stretch out our capital as long as possible?" Nick asks in an e-mail.
We asked Warren MacKenzie, of Weigh House Investor Services, to look at Nick and Nora's situation.
What the expert says
If Nick and Nora retire too soon and run out of money, they will wind up living with their daughter-in-law, "and this is not the way they want to end their life," Mr. MacKenzie says. If necessary, they are willing to work a few more years.
"It is important to get this right," the planner says. "If they shut down their business and discover they've made a mistake, they will not be able to reopen it in five years' time."
During the first 10 years of their retired life, Nora and Nick want an extra $28,000 a year to cover travel expenses on top of the $50,000 a year after tax they will need for living expenses. They plan to downsize their home in five years, which will add another $300,000 to their savings.
Based on Nick's assumptions of a 5-per-cent annual return on investments, the couple is well set. "From a financial point of view, working longer is unnecessary," Mr. MacKenzie says. When their house and condo are included, they will still have $1.1-million by the time Nora is 90.
That leaves the emotional question people approaching retirement must ask: "Are you ready to change your lifestyle and give up the career and connections you have spent a lifetime building?"
Nick and Nora do face one big risk. The way Nick is managing the portfolio, they may not achieve their targeted 5-per-cent average return. They can easily afford one or more professional money managers given their $1.2-million portfolio, and over time, 5 per cent is a reasonable return for them to achieve, Mr. MacKenzie says. But having been burned a few times by financial advisers of one sort or another, Nick has decided to manage their savings himself.
"The portfolio he has created is, on the one hand, too conservative because half the portfolio is in short-term money market securities [which yield very little]" the planner notes. But it is also too risky because the other half is concentrated in two speculative energy stocks.
"Nick is swinging for a home run on these two securities" - not a suitable strategy for someone contemplating retirement. "If either one of these two companies goes out of business within a few years, they will have to scrap their travel plans and cut back on their lifestyle in order to maintain their financial independence," the planner cautions.
"If Nick understood the difference between investment counsellors and financial advisers, he might be more comfortable in having at least half of their portfolio managed by a professional." Either way, "the most important step he needs to take, before taking irrevocable steps to retirement, is to sensibly diversify his portfolio."
To reduce income taxes, Nick should ensure that Nora saves all of her income so that her portfolio grows with both the income it earns and her savings from Old Age Security and Canada Pension Plan. As her portfolio increases, she will move into a higher tax bracket and as his portfolio decreases, he will move to a lower tax bracket. To help with this, he can pay all of her expenses, including her income taxes. He can also lend her money to invest.
Nick will have to convert his RRSP to a RRIF soon, but since Nora is younger, he can contribute to her spousal RRSP until she is required to convert to a RRIF. Converting an RRSP to a RRIF does not mean the asset mix has to be changed. When the money is withdrawn from the RRIF, the calculation of the minimum withdrawal can be based on Nora's age, resulting in a lower withdrawal so the funds will last longer.
Nick, 70, and Nora, 63
Making the transition from working and saving to retiring, converting their RRSPs to RRIFs and ensuring they meet their retirement income goals.
Balance their investment portfolio, consider professional money management and arrange retirement income to minimize income tax.
A secure retirement with the money they need to travel the world.
Monthly net income:
Home $550,000; condo $210,000; Nora's RRSP $255,000; Nick's RRSP $570,000; jointly owned corporate investments $430,000; non-registered savings $10,000. Total: $2,025,000.
RRSPs $1,350; groceries, drinks, takeout $850; lunch, latte, dining out $340; clothing, dry cleaning $120; medical, drugs, dental $250; household help $500; gifts $140; property taxes, condo fees $300; house insurance $55; heating, hydro, water $320; repair and maintenance $100; furniture, appliances $100; vacations $2,100; reading, music $50; golf club $268; club dining $100; auto expenses $250; other $200; group insurance $90; charitable donations: $50. Total: $7,533.
Special to The Globe and Mail