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In the longer term, Kyle and Talia are concerned about having enough money for health care or assisted-living costs if the need arises.

Glenn Lowson/Globe and Mail

Kyle and Talia have done almost everything right financially and now they’re preparing to reap the rewards – helped, as is often the case, by an impressive rise in the value of their house over the years. He is 59, she is 58. They have four grown children who are well-established in their careers.

Both Talia and Kyle are self-employed and have no work pensions, although they do have registered retirement savings plans. Their goal is for Kyle to quit working in a couple of years and pursue his passion for sculpture. Talia would gradually scale back her consulting business over the next four years. They want to “have enough money to travel Canada and the world and enjoy culture and entertainment in our city now and for the next 25 years,” Kyle writes in an e-mail.

They plan to sell the family home in 2020 and buy something smaller and less expensive. “How much can we afford to spend on our next home while maintaining our monthly budget?” Kyle asks. Their retirement spending goal is $7,200 a month, or $86,400 a year after tax, in line with their current spending.

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Longer term, they are concerned about having enough money for health care or assisted-living costs if the need arises.

We asked Ross McShane, who holds several professional designations and is vice-president of financial planning at Doherty & Associates in Ottawa, to look at Kyle and Talia’s situation.

What the expert says

Downsizing their $2-million house to one costing between $750,000 and $1-million would be reasonable, Mr. McShane says. The balance would be invested in their non-registered investment account.

First, Mr. McShane looks at how the couple would generate cash flow of $7,200 a month, indexed to inflation, as they ease out of their working years. They will also want to minimize income tax by splitting income to the extent possible and use up their lower tax brackets by paying some tax now (on RRSP withdrawals) to avoid paying tax at a higher rate later.

They will have a cash-flow gap this year as Kyle reduces his consulting income to $20,000. “I recommend withdrawing $25,000 from Kyle’s RRSP in 2018 to help cover this gap,” Mr. McShane says. “The withdrawal will be taxed in a low 20-per-cent to 24-per-cent tax bracket versus 29.65 per cent or higher later on.”

Each year, Talia and Kyle should look at their projected income to determine how much they should withdraw from their RRSPs. They will also have to factor in the income that will be generated by the proceeds of their house sale.

The couple hopes to buy a new vehicle next year; the planner says they could tap their tax-free savings accounts and replenish them the following year when they sell the house.

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Kyle and Talia have a combined $692,000 of registered investments, with 65 per cent in equity exchange-traded funds, 30 per cent in fixed income and 5 per cent in cash. They’re paying 0.5 per cent a year in fees to their portfolio manager and are happy with their returns.

In preparing his financial plan, Mr. McShane uses a 4.5 per cent average annual return net of fees.

By the time Kyle and Talia are age 65 and dependent on their investments, their portfolio withdrawal rate will be slightly more than 3.5 per cent a year, the planner says. This will rise due to the impact inflation will have on their expenses. As well, their taxes will increase as they begin to withdraw the mandatory minimum each year (starting at age 72) from their registered retirement income funds.

From age 72 on, their marginal tax rates will be higher because of the additional income from mandatory RRIF withdrawals, Mr. McShane says. “This is the reason for implementing the early RRSP withdrawal strategy.”

For their non-registered accounts, which will be fattened by the proceeds of the house sale, the planner suggests short-term bond ladders, rate reset preferred shares and dividend growth stocks to hedge against inflation and provide a steady stream of tax-efficient income.

Finally, the concern about health-care costs when Kyle and Talia are old. They may find they spend less as they grow older because they may travel less, Mr. McShane notes. If they need to move to an assisted living home, their existing living costs could be “steered toward the cost of retirement home care,” he says. They’d still have the value of their home to fall back on.

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“The perfect storm is created when one spouse needs assisted care and the other is still healthy and can remain in their own home,” the planner says. Kyle and Talia may want to ensure they have a strategy in place to allow the healthy spouse to avoid having to sell their home to help pay for the health-care costs of the ailing one.

Client situation

The people: Kyle, 59, and Talia, 58

The problem: How much can they afford to spend when they downsize their house and buy a smaller place without jeopardizing their living standard?

The plan: Arrange their finances in the most tax-efficient way possible. Buy a place in the $750,000 to $1-million range and invest the balance.

The payoff: All the money necessary for a rich and full life after work.

Monthly net income (2018): $5,160

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Assets: Cash $16,300; his TFSA $53,500; her TFSA $54,000; his RRSP $291,500; her RRSP $293,000; residence $2,000,000. Total: $2.71-million

Monthly outlays: Property tax $300; home insurance $75; maintenance $500; utilities $370; transportation $535; groceries $600; clothing $120; health, dental $420; drugstore $110; health, dental insurance $230; life insurance $200; phones, TV, internet $365; entertainment, dining $550; hobbies, activities $450; gifts, charity $255; travel $1,500; personal $240; miscellaneous $380. Total: $7,200. Shortfall: $2,040 to come from RRSP withdrawal and cash in the bank.

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