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Sally and Will have been managing their own investments and are worried whether their portfolio is diversified enough, given their age and retirement plan.

Mark Blinch

Will and Sally are in their early 50s and want to retire in a few years.

"We think we can do it but we are not sure," Sally writes in an e-mail. They work in financial services, bringing in $200,000 plus bonuses between them and have no children.

Their short-term goals are to pay off their mortgage this year and complete the renovations to their cottage. When they retire, they plan to sell their condo, invest the proceeds and move into the cottage. Their retirement spending goal is $60,000 a year (after tax), which includes travelling and spending three months each winter down south.

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They have been managing their own investments and are concerned whether they are on track, Sally adds. They are invested entirely in equities. "Are we properly diversified given our age and retirement plan?" Sally asks.

Sally has a defined benefit pension plan at work that will pay about $29,000 a year at the age of 59. Will has a defined contribution plan as well as a company stock purchase plan. Both have unused contribution room in their registered retirement savings plans and tax-free savings accounts.

We asked Ross McShane, director, financial planning, at McLarty & Co. Wealth Management Corp. in Ottawa, to look at Sally and Will's situation.

What the expert says

In preparing his calculations, Mr. McShane assumes Will retires at the end of 2018, at the age of 57. Sally would retire at the end of 2020, at the age of 59. Will has about $30,000 of RRSP carry-forward room (2016) and $46,500 of unused TFSA room. Sally has about $30,000 of unused RRSP room and about $29,500 of TFSA room. The planner assumes an average annual return of 4 per cent on their investments, a 2 per cent inflation rate and that they sell the condo in five years for $425,000 net of expenses.

Sally is in a higher tax bracket than Will, so Mr. McShane recommends she transfer about $30,000 from their non-registered stock portfolio to her RRSP. "This will allow for a 43.4 per cent tax savings, or $13,000, that can then be used to fund her TFSA," he says.

Will could do the same. He may well be in the same tax bracket when he retires as he is now, but at least he will get the tax deferral, the planner says. He can use the refund to start building savings in a TFSA.

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The cottage renovation is estimated to cost $60,000 and be completed in 2017. Will and Sally will need to save another $25,000 over the next year for the renovations, Mr. McShane says. Their mortgage will be paid off in July and the bi-weekly payment of $1,550 could be tucked away in a daily interest savings account until it is needed in 2017. "This, along with existing savings, will provide them with the necessary funds."

As for their investments, they need a 4 per cent return to meet their spending target, "which can be achieved with a balanced portfolio," Mr. McShane says. Sally has guaranteed income from her defined benefit pension plan, which could be viewed as the fixed-income part of their portfolio. Even so, they could lower their equity weighting and still achieve their goals. If they decide to add some fixed income securities, it is generally more tax-efficient to do so in their RRSPs, the planner notes.

When Will and Sally sell their condo in five years, the proceeds will be tax-free under the principal residence exemption. They can integrate the funds into their overall portfolio according to their asset mix strategy, the planner says. "Self-directing part of their portfolio is fine as long as they have a system in place to monitor their asset mix, sector weightings and holdings," he says. "Emphasis on preservation of capital is key, and they must be sure to evaluate their performance against the appropriate benchmarks."

At retirement, Sally will have a pension of $29,000 a year. The balance of cash flow required to cover their lifestyle expenses can be drawn from one or more of their various "pots" of money: RRSPs, Will's defined contribution plan, their TFSAs and their non-registered investments – which are projected to be worth $1.7-million – in the most tax-efficient manner considering tax rates and other factors at that time, Mr. McShane says.

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Client situation

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The people: Will and Sally, both 54.

The problem: Are they on track for an early retirement?

The plan: Draw on cash and stocks to use up RRSP room to get tax refund for 2015 tax year. Use tax refund to contribute to TFSAs. Diversify investment portfolio to lower risk.

The payoff: Will retires at 57 and Sally at 59 with money to spare.

Monthly net income (excluding bonus): $12,850

Assets: His investments (cash, stocks) $58,931; joint non-registered investments $97,234; his RRSP $78,482; her RRSP $255,000; her TFSA $17,000; his DC pension plan $374,500; est. present value of her DB plan $365,000; principal residence $425,000; cottage $420,000. Total: $2.1-million

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Monthly disbursements: Mortgage $3,358; property tax $493; home insurance $108; maintenance $110; utilities, water $417; grocery store $400; clothing $130; life insurance $203; doctors, dentists $115; telecom $257; entertainment $500; hobbies $425: gifts $150; travel $100; miscellaneous $10; transportation $529. Total $7,305

Liabilities: Home mortgage $25,711

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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