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Sara and her husband, Rob, want to retire in two years.Jennifer Roberts/The Globe and Mail

Sara is age 58 and basking in the glory of a job that pays more than $370,000 a year in total remuneration, including bonuses, salary and vested shares. “I haven’t always made that much,” she writes in an e-mail. “The last few years … have been very prosperous for me.”

Sara and her husband, Rob, want to retire in two years. Rob, who is 57, is self-employed and makes more than $60,000 a year. He also earns net rental income of about $50,000 a year.

They have one child, age 19, who is going to college and is home on weekends and during the summer.

Rob and Sara own their Toronto house outright. The rental property has a small mortgage that they plan to pay off while they are still working and have surplus cash flow.

“We want to have 10 years of good travel from age 60 to 70, with one big, three-month trip per year,” Sara writes. They also plan to buy a new electric vehicle.

Once they sell their house, they plan to buy two new properties: a condo in downtown Toronto and a townhouse north of Toronto on Georgian Bay near hiking trails and the Blue Mountain ski slopes. Their son would share the city condo and help cover the costs. “We would budget $900,000 to $1-million [cash] for each,” Sara adds.

They plan to sell the rented house in a decade or so “to support our retirement from age 70 onwards.” Their retirement spending target is $120,000 a year after tax.

We asked Warren MacKenzie, a fee-only certified financial planner (CFP) and chartered professional accountant in Toronto, to look at Rob and Sara’s situation.

What the Expert Says

“Sara takes great satisfaction in her outstanding success as a business professional,” Mr. MacKenzie says. “She has recently been promoted, and with salary, bonuses and benefits she now earns $370,000 per year.”

Rob and Sara already have enough to achieve their retirement spending goal, the planner says.

Mr. MacKenzie’s forecast shows that if they live to age 100, they will leave their son about $2-million in dollars with today’s purchasing power.

If they are concerned about cash flow in the early years, Sara could continue working part time from home, the planner says. “This would keep her busy and her mind sharp, and would also give them additional funds to spend or give away.”

After they retire, and until they sell their rental property, they will need additional cash flow to make ends meet, the planner says. They should draw sufficient funds from their registered accounts (but not their tax-free savings accounts) so that they each have taxable income of less than $90,599 a year, at which point they’d be bumped to a higher tax bracket, Mr. MacKenzie says. Over the long term, their income tax will be minimized if Sara and Rob’s taxable incomes are roughly the same.

This would also reduce the future clawback of Old Age Security. Drawing on these registered funds when their income is relatively low means the account balances will be smaller when they have to begin taking mandatory minimum withdrawals later, when they will also be getting Canada Pension Plan and OAS benefits. RRSPs must be converted to registered retirement income funds at age 71 and withdrawals must start in the year the person turns 72.

Sara has two relatively small defined benefit pension plans from previous employers with bridge benefits that end when she turns 65. “Both of Sara’s DB pensions should be split for income tax purposes” as soon as they quit working, the planner says. In splitting their income, they will need to take into account Rob’s rental income.

In the year 2027, their annual cash outflow will consist of $149,000 for living expenses and travel, income tax of $38,000 and rental expenses of $16,000, for a total of $203,000. By this time they will have used up their non-registered funds.

Their cash inflow will be made up of $92,000 a year from Sara’s registered accounts (excluding her TFSA), $30,000 from Rob’s RRSP, $68,000 of rental income, and $13,000 from Sara’s DB pensions. Because Sara’s LIRAs (her current DC plan and her LIRA from a previous employer) are less liquid and have maximum and minimum withdrawal limits, she should take the maximum withdrawal from them and make up the difference from her personal RRSP, the planner says.

Until they sell the rental property, it would make sense for them to stop contributing to their TFSAs because they would have to withdraw from their other registered accounts to do so, paying tax on the withdrawals. Once the property is sold they can catch up with their TFSA contributions, Mr. MacKenzie says.

The portfolios, which they manage themselves, are 100 per cent invested in publicly traded stocks, half Canadian and half foreign. Their holdings are not properly diversified and their portfolio does not appear to be designed to take only the amount of stock market risk necessary to earn the rate of return they need to achieve their goals, Mr. MacKenzie says.

Their accounts are held at seven different financial companies so their financial situation is unnecessarily complicated, he notes. “It is therefore not possible for them to be following a disciplined investment and rebalancing process.”

They should consider combining Sara’s DC pensions into one LIRA and moving their TSFA and RRSPs to the same company. “Then with a simplified portfolio, they could move to a goals-based asset mix and start to follow a disciplined rebalancing process when one asset class gets out of whack.”

They should also insist on a performance report that shows how their portfolio fares compared to the proper benchmark. “With this information, if the portfolio is underperforming they’ll be able to take whatever corrective action is required.” They should look to hire either a professional portfolio manager who works as a fiduciary or an online portfolio manager, or robo-adviser, he says.

After they sell their rental property, they will have surplus funds on hand. They should consider giving their son inheritance advances so he can gain some experience managing money. They should also give him funds to open a First Home Savings Account.

Client Situation

The People: Rob, 57, Sara, 58, and their son.

The Problem: Can they afford to retire in a couple of years and travel extensively?

The Plan: When they first retire, their cash flow will come from his rental income, her DB pensions, her LIRAs, their RRSPs and their non-registered portfolio. They might consider advance inheritance to their son.

The Payoff: More than one option to ensure they meet their goals.

Monthly net income: $26,000, variable.

Assets: Non-registered $11,960; her DC pension plan and LIRA from a previous employer $282,505; her personal RRSP $330,725; his personal RRSP $142,700; his TFSA $54,420; her TFSA $79,500 residence $2,000,000; rental property $1,600,000. Total: $4.5-million.

Estimated present value of her DB pensions: $250,000

Monthly outlays: Property tax $560; water, sewer, garbage $75; home insurance $140; electricity $130; heating $130; maintenance, garden $250; transportation $725; groceries $800; clothing $520; meal service $320; gifts $250; charity $425; vacation, travel $1,765; dining, drinks, entertainment $1,540; personal care $100; pet expenses $355; dog walking $500; sports, hobbies $90; subscriptions $110; home decor/art $500; health care $50; life, disability insurance $50; her cellphone, tablets, laptop $170; his phone, internet $105; her RRSP contribution $3,085; his RRSP contribution $150; RESP $100; her TFSA $1,000; his TFSA $100. Total: $14,095.

Liabilities: Rental property mortgage $147,670 at 5 per cent.

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

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