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Geoff Robins/The Globe and Mail

Ruth and Rory are in their early 50s and thinking about the day they can retire from work. He is in sales earning about $154,000 a year plus bonus. She's an administrator earning a little more than $50,000 a year. They have two children, 19 and 21.

Both Rory and Ruth have defined benefit pension plans.

Their goal is to fatten up their investment portfolio and their tax-free savings accounts and pay off their line of credit. Rory hopes to retire in three years or so, when he would be 56. Ruth plans to work longer. They hope to maintain their current lifestyle with a retirement spending goal of $110,000 a year after tax.

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They are mainly concerned about investing and income tax planning.

"Do we have a solid retirement portfolio to live out the rest of our lives without any financial stress?" Rory asks in an e-mail. Their ace in the hole seems to be Rory's indexed pension, which will pay him $75,200 a year, including bridge benefit, at age 56. He also has a non-indexed pension from a previous employer that will pay $30,000 a year at age 55.

We asked Warren MacKenzie, a principal at HighView Financial, to look at Ruth and Rory's situation. HighView is an investment counselling firm.

What the Expert Says

Ruth and Rory wonder if they can afford to retire when he is 56 (in 2019) and she is 59 (in 2024). They also wonder what they can do to minimize taxes. They're in good shape financially. In addition to their pension plans – which will pay them more than they spend each month during their retirement – the combined value of their home and investment portfolio is about $1.2-million, Mr. MacKenzie says.

"On the first question, the financial plan shows that because of their indexed pensions, they can afford to retire as planned." They had considered taking the lump-sum commuted value of their pensions but changed their minds. "They have wisely decided that at retirement, they will take the pensions rather than the commuted value."

There are a number of things the couple can do to minimize income taxes, the planner says. They can shelter income by using their registered retirement savings plans, tax-free savings accounts and tax-exempt insurance. With tax-exempt insurance, there is no tax on the growth of the cash value in the policy and no tax on the final distribution at death. The rules for tax-exempt policies will change at the end of 2016, so if they are interested in exploring this opportunity, they should act quickly, he says.

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As well, they can choose investments that will generate capital gains and dividends rather than interest income. And they can split their pension income so they are closer to being in the same income tax bracket when they retire, he adds.

They can do things that will equalize their investment income. For example, Ruth has the larger investment portfolio so she will earn most of the investment income. To keep taxes to a minimum over the long term, it would be better if they both earned the same investment income and were in the same income tax bracket, Mr. MacKenzie says.

They can achieve equal investment portfolios by having Ruth pay all the bills so that Rory can save all of his pension income and invest it. By doing this, he will eventually increase the size of his investment portfolio so that they will both earn the same amount of investment income, and with pension splitting, be in the same bracket, the planner says.

Rory and Ruth wonder where they should invest their portfolio for best returns. "The proper asset allocation and investment strategy should be goals-based," Mr. MacKenzie says. "That means the portfolio should be designed so that they take no more risk than is necessary to achieve their important financial goals."

The fact they are sitting with $115,000 in cash suggests that they are not following a disciplined process, he adds. "Over the long term, the investment process is more important than the investment products." He suggests they use some of this cash to pay off their line of credit.

"Their financial plan shows that their net worth will be growing every year, so one of the first things they should do is to sit down and have a discussion about their long-term goals," Mr. MacKenzie says. Their choices include spending more money, giving to charity or giving to their children, he adds. "If they give to charity, it will reduce tax on investment income and also give them a donation tax credit."

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Because they will have more pension income than they will need based on their spending goal, they can stick to a low-risk investment portfolio heavily weighted in fixed-income securities. Conversely, if their most important goal is to leave the biggest estate possible, they could consider a portfolio invested solely in equities, Mr. MacKenzie says. Given the long-term nature of this investment, the way to minimize income tax would be to use capital-gains-producing investments rather than interest- or dividend-earning ones, he adds.

Rory enjoys picking stocks, but in order to manage their investment portfolio wisely, they should consider using robo-advisers (online portfolio managers), exchange-traded funds or best-in-class portfolio managers rather than trying to pick stocks themselves, "and they should keep it simple."

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The People: Ruth, 50, and Rory, 53.

The Problem: Are they in a position to retire worry-free and live a comfortable lifestyle? How can they best keep taxes to a minimum?

The Plan: Take full advantage of available tax shelters, including tax-exempt life insurance. Lean toward capital-gains-producing investments. Try to equalize their investment portfolios by having Ruth pay the bills and Rory add to his savings. Consider gifting to children or charities. Pay off line of credit.

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The Payoff: Plenty of time to enjoy the fruits of their labours.

Monthly net income: $10,845.

Assets: Bank accounts $115,000; stocks $325,000; mutual funds $45,000; her TFSA $52,000; his TFSA $52,000; his RRSP $53,000; her RRSP $87,000; estimated present value of their combined pension plans $2.7-million; RESP $101,000; residence $350,000. Total: $3.9-million.

Monthly disbursements: Property tax $350; home insurance $210, heating $200; water, sewer $80; electricity $130; maintenance, garden $230; transportation $655; grocery store $980; clothing $120; line of credit $2,000; charitable $50; vacation, travel $300; other (gifts) $50; dining, drinks, entertainment $850; grooming $25; pets $125; cellphones, Internet, TV $250; RRSP and non-registered $750; TFSAs $1,000. Total: 8,355. Surplus: $2,489 (gets spent or added to their bank account.)

Liabilities: Line of credit $12,250.

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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