Bill and Barbara want to retire as soon as possible. Bill is age 41, Barbara is 40. They have two children, ages 5 and 10.
Barbara brings in $140,000 a year in a management job, but she wonders whether she can afford to quit and work part-time at another job instead. Bill, who was laid off recently, is collecting employment insurance and plans to train for another job. He hopes to be working again by the middle of next year. They own their house outright and have no debt.
"We have saved over $1-million, which I have been managing myself using a couch potato strategy," Bill writes in an e-mail. "This money is spread among dozens of mutual funds, ETFs, and index funds," Bill adds. "I have a spreadsheet that tries to keep track of the [asset] allocation, but it's getting a bit unruly to say the least.
"To complicate matters, my wife has amassed a fair bit of stock through her company and has a [defined contribution] pension that she is contributing to."
Their goal is to retire by age 50, "but we don't know if this is possible," Bill adds. "Can we also pay for private school for the two kids and go on the odd vacation? How do I arrange the investments to pay us a salary in retirement?"
We asked Jason Pereira, a partner and financial planner at Woodgate Financial Inc. and IPC Securities Corp. in Toronto, to look at Bill and Barbara's situation. Mr. Pereira holds the certified financial planning (CFP) designation, among others.
What the expert says
Mr. Pereira lays out the following assumptions. Barbara starts working part-time next year earning $30,000. Bill goes back to work and earns $50,000. They take a trip every two or three years costing $10,000 each time. Starting in 2027, they buy a car every 10 years costing $30,000.
Because this will be Barbara's last year working full-time, she should contribute as much as possible to her registered retirement savings plan while her income is still high, the planner says. "After that, neither should make any further RRSP contributions."
Tax-free savings accounts are a different story. They should both contribute the maximum to their TFSAs for the rest of their lives. The maximum contribution is currently $5,500 a year each. They won't need the money. "These accounts will create a tax-free inheritance for their children," Mr. Pereira says.
As for the children's education, Bill and Barbara should continue to make contributions to their registered education savings plan every year until they have received the maximum government grant. All additional non-registered savings should be in a joint account, he says.
In 2027, when Barbara is age 50, she retires fully. Bill retires a year earlier. By the time Barbara quits, their non-registered portfolio will be $258,570, their RRSPs $1,214,865, Barbara's defined contribution pension plan $315,196, their TFSAs $382,175 and a locked-in retirement account $15,637, for a total of $2.2-million. Their children's RESP will be $109,923.
They will start collecting Canada Pension Plan benefits at age 60 and Old Age Security at 65. They can convert their RRSPs to registered retirement income funds (RRIFs) as soon as they retire in order to spread the tax bill over a longer period of time, resulting in an estate that is $500,000 larger than if they had waited until age 72 to begin making mandatory minimum withdrawals, Mr. Pereira says.
To work, the plan requires a minimum rate of return on their investments of 3.25 per cent, Mr. Pereira says. In his forecast, he assumes a rate of return of 6.4 per cent a year while they are still working, dropping to 5.6 per cent once they have retired.
"Congratulations! You can both retire early at age 50," Mr. Pereira says. Even so, he suggests they consider working a few more years to make their retirement more secure.
Finally, Mr. Pereira looks at the couple's investments. Bill has done an all right job of managing the portfolio himself, the planner says, but it could be more tax efficient. For example, they could switch to corporate class mutual funds in their non-registered account, which would increase their estate by $900,000, he adds.
(Corporate class funds can convert up to 100 per cent of the return on the fund into deferred capital gains. That means even bond interest can be taxed at lower capital gains rates. Also, it is largely deferred, meaning that tax is not triggered until they choose to sell.)
Barbara has "way too much exposure to her employer's stock" through her share purchase plan. The planner suggests she liquidate her company stock over the next few years, using some of the proceeds to create an emergency fund covering six months of expenses.
After they have retired, but before they are 65, they should "look to draw enough RRSP income to give themselves the same income," Mr. Pereira says. "Post 65, split all income 50/50."
Finally, Bill and Barbara might want to consider working with an investment adviser to put together a properly diversified and professionally managed portfolio. A good adviser will also help them manage their insurance, tax and estate needs.
The people: Bill, 41, Barbara, 40, and their two children.
The problem: Can they afford to retire early without jeopardizing their financial security? Can Barbara start working part time?
The plan: Barbara starts working part-time next year when Bill goes back to work. They can retire at age 50 if they choose, but they might consider working a few years longer.
The payoff: A path to a financially secure early retirement with all other needs met.
Monthly net income (2016): $8,790
Assets: Cash $5,000; her stocks $100,000; joint non-registered $147,000; her TFSA $64,000; his TFSA $66,000; her RRSP $296,000; his RRSP and LIRA $306,000; her DC pension plan $144,600; RESP $73,000; residence $600,000. Total: $1.8-million
Monthly disbursements: Property tax $225; water, sewer $35; home insurance $130; heat, electricity $250; maintenance, garden $120; transportation $400; groceries $800; clothing $55; gifts, charity $50; vacation, travel $200; dining, drinks, entertainment $145; grooming $35; pets $50; sports, hobbies $500; subscriptions $20; health care (dentists, drugs, supplements) $40; health, life insurance $55; phones, Internet, TV $130; RRSPs $1,250; RESP $415; TFSAs $915; her pension plan contributions $595; group benefits $215. Total: $6,630
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