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Although they own their Calgary home outright, have no debts and have built up substantial assets in their holding company, Melanie and Marv have to plan for two big unknowns: rate of return on investments and life expectancy.Chris Bolin/The Globe and Mail

Melanie and Marv own a small business that provides services to the oil and gas industry. He is 55, she is 52.

With revenue slowing, they are "considering the possibility of transitioning out of the business world," Melanie writes in an e-mail. "We foresee many years of close to full-time volunteer work in our church community, travelling for pleasure, visiting grandchildren and caring for out-of-province, aging parents," she adds.

They have two children, ages 20 and 26, one of whom is still in university.

They own their Calgary home outright, have no debts and have built up substantial assets in their holding company, but do they have enough to retire so young?

"Having planned many years for this transition, we have avoided debt, lived below our means and been consistent savers and investors," Melanie writes. "Our challenge is in knowing how much savings we need to fully embrace this next phase of our lives, especially given today's low interest rates."

Their goal is to maintain their current standard of living in retirement.

We asked Brinsley Saleken, a fee-only financial planner and portfolio manager at Macdonald, Shymko & Co. Ltd. in Vancouver, to look at Melanie and Marv's situation.

What the Expert Says

Melanie and Marv have a solid foundation and have done very well for their age, Mr. Saleken says.

"The challenge they face of wanting to step away at this stage is they are young and life expectancy continues to increase," the planner says. If they quit working now, they could face 35 years or more in which they rely mainly on their asset base to support their needs.

Their spending goal is about $9,200 a month ($110,400 a year), which means they would need about $140,000 a year before tax.

"Based on my analysis, while it does potentially seem possible (that they could meet this goal), there is very little margin of safety," Mr. Saleken says.

Melanie and Marv have to plan for two big unknowns: rate of return on investments and life expectancy. Mr. Saleken assumes a gross return on investments of 5 per cent a year over their statistical life expectancy (age 83 for him and 86 for her) plus five years, and again adding 10 years.

Given their current assets (minus their home) of roughly $2.65-million, their asset base, plus their Canada Pension Plan and Old Age Security benefits, could produce pretax cash flow of $138,000 a year with five years added to their life expectancy, and $130,300 a year with 10 years added.

That assumes Marv will be entitled to 65 per cent of the maximum CPP benefits and Melanie 69 per cent. Marv will begin collecting OAS benefits at age 65 plus eight months, Melanie at age 67.

"From a conservative perspective, it would appear the current asset base is not quite in the zone where we are comfortable suggesting their goals have been achieved," Mr. Saleken says. If they could "go through a period of transition" where they worked less but still generated some income, "this would go a long way to providing the margin of safety in their asset base," he adds.

Marv and Melanie also have to consider investment risk, including ups and downs in the value of their portfolio and losing spells. "Is rate of return and thus higher potential cash flow more important than safety of principal?" the planner asks.

To ease into retirement, Mr. Saleken suggests the couple review their spending patterns while they are still working "so as to understand the impact in advance of actual retirement."

Once they have hung up their hats, the planner suggests they draw first from their tax-paid assets and corporate holdings. Deferring withdrawals from their RRSPs/RRIFs as long as possible (to age 72) will "create more longevity in their asset base," he says. Old Age Security clawback is not really a concern given the control they have over cash flow based on the corporate holdings. If there are opportunities to take funds from the corporation on a tax-advantaged basis, these should be pursued, the planner says.

At some point, when they are older, Melanie and Marv may want to consider using part of their assets to buy annuities "to eliminate both longevity risk and also investment risk," the planner says. They may feel more comfortable knowing they have a base level of cash flow that does not depend on how long they live and what happens in the investment markets.


Client situation:

The people: Marv, 55, Melanie, 52, and their two children.

The problem: With business in the oil patch slowing, they are turning their thoughts to retiring and doing volunteer work. But do they have enough money?

The plan: To retire now and maintain their current spending would be tight. Consider working part-time for a while so they can generate more income and savings. Review spending while they are still working.

The payoff: Financial security.

Monthly net income: $10,460

Assets: Bank accounts $52,000; holding company investments $1,646,000; his TFSA $36,500; her TFSA $36,500; his RRSP $320,000; her RRSP $419,000; children's RESP $20,000; residence $500,000; retained earnings in operating company $90,000; cash surrender value of his insurance policy $34,685. Total: $3.15-million.

Monthly disbursements: Property tax $215; home insurance $100; utilities $350; maintenance, repairs $1,000; auto insurance $365; fuel $430; auto maintenance $300; grocery store $1,000; clothing $200; gifts $250; charity $1,000; vacation, travel $1,500; other discretionary $250; dining, entertainment $550; grooming $100; golf $75; subscriptions $20; doctors, dentists $150; drugstore $50; health, dental insurance $350; life insurance $325; disability insurance $130; cellphones $250; telephone, TV, Internet $230. Total: $9,190.

Liabilities: None.

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