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(Dave Chan For The Globe and Mail)
(Dave Chan For The Globe and Mail)

FINANCIAL FACELIFT

Wealthy couple want to enjoy the fruits of their labour Add to ...

Three years from retiring fully, Deborah is still working flat out, fearful that she and her husband, David, “won’t have enough” to maintain their expensive lifestyle despite their considerable wealth.

David is 67 and has just sold his consulting business for $1-million, to be paid out over the next three years. Deborah, who is 57, brings in $120,000 a year as a consultant. They plan to work half time for another three years, earning about $175,000 between them before they sell their city home in Ontario and move to their house in the Maritimes, where they also have an urban pied-à-terre.

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The two are seeking independent advice “to solve, once and for all, our eternal, endless and circular discussions about whether we have enough money to retire,” Deborah writes in an e-mail. Their son is in university and his education expenses are provided for, she adds.

“I know it may seem weird to have so many assets and say we need help, but frankly, if I don’t see the money in my bank account, I don’t feel very rich at all,” Deborah writes. High on their list of retirement goals is travelling, at least for the first few years.

“I don’t want to end up like my parents, who scrimped and saved, who now both have dementia, are in a nursing home, and never really benefited from their savings,” she adds. We asked Warren Baldwin and Matthew Ardrey of T.E. Financial in Toronto to look at Deborah and David’s situation. Mr. Baldwin is regional vice-president, Mr. Ardrey is consultant and manager of financial planning.

What the experts say

Through hard work, David and Deborah are in a position most Canadians would envy, the planners say. “They are now ready to enjoy the fruits of their labour.”

Deborah’s nagging concerns are common among those making the transition from working life to retirement, hence from saving to spending, they note. Failing to make this switch successfully may leave people feeling poor even when they are well off.

In their calculations, Mr. Baldwin and Mr. Ardrey made some basic assumptions. David and Deborah will retire fully in three years, when he is 70 and she is 60. Their savings will earn 5 per cent a year, while the inflation rate is 2 per cent. They will both live to be 90. The planners further assume the two continue to make maximum annual contributions to their registered retirement savings plans and tax-free savings accounts, and that they tuck away an additional $15,000 a year each in their taxable investment account.

The planners assume David will have received the full payout from the sale of his business by 2016 and that the couple will have received parental gifts or inheritances of $550,000. The sale of their Ontario condo will add another $450,000 to their savings.

Deborah will begin collecting reduced Canada Pension Plan benefits when she retires at age 60, while David will get increased benefits at age 70. The planners excluded Old Age Security benefits because the money will likely be clawed back. As well, Deborah has two small pensions from previous employers, one for $5,461 a year indexed to inflation and one for $7,740, not indexed.

Their current lifestyle expenses are $81,500 a year, which will rise in retirement to $100,000 plus a travel budget of another $20,000 a year for five years. That basic $100,000 a year will have climbed to $106,121 in three years because of inflation. Their savings (including inheritances) will add up to roughly $3.25-million.

By the time Deborah is 72 and both are having to withdraw money from their registered retirement income funds in addition to their CPP benefits and Deborah’s pensions, their total after-tax income will be $164,464. Their expenses, indexed for inflation, will have risen to $134,587 a year. When Deborah is 90 years old, she will still have financial assets of $2.8-million. She will also have her condo and house in the Maritimes.

Looked at another way, the couple would have to spend $142,733 a year in 2012 dollars to exhaust their savings by Deborah’s age 90, the planners calculate.

With such a large investment portfolio, Deborah and David “will really need to pay close attention to their investment fees,” the planners say. On a portfolio of $3.25-million, every one percentage point reduction in fees will generate annual savings of $32,500. They suggest the couple hire a professional investment counsellor.

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Client Situation

The people

David, 67, and Deborah, 57

The problem

How to overcome Deborah’s nagging – and irrational – fear that they do not have enough money saved to retire.

The plan

Understand that shifting from saving to spending can be difficult. Because they will be relying so heavily on their investments, keep a close eye on fees, using low-cost investment products that are well diversified and bear little risk. Then relax.

The payoff

The attitude needed to allow them to enjoy their travels, good health and good fortune.

Monthly net income

$20,450

Assets

Term deposits $80,000; David’s business $1,000,000; tax-free savings accounts $42,000; her RRSP $397,295; his RRSP $430,365; son’s RESP $65,000; house and condo in the Maritimes $600,000; city condo $450,000; present value of her pension plans $102,805. Total: $3.2-million

Monthly expenditures

Property taxes $800; utilities, maintenance $1,005; transportation $600; groceries $500; clothing, cleaning $450; gifts, charitable $300; vacation, travel $800; other discretionary $500; personal (grooming, dining and drinks, entertainment, subscriptions) $1,020; dentists, drugstore, life insurance $250; telecom, cable, Internet $540; RRSPs $1,500; TFSAs $915. Total: $9,180

Liabilities

None

Want a free financial facelift? E-mail finfacelift@gmail.com

Some details may be changed to protect the privacy of the persons profiled.

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