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Excluding their emergency fund, their asset mix is 2 per cent cash, 16 per cent GICs, 19 per cent fixed income and 63 per cent in equities.Laura Proctor/The Globe and Mail

At age 69, Hank is “moving toward exiting work,” he writes in an e-mail. His wife, Caroline, age 64, is no longer working. They have two adult children, 29 and 33, and a mortgage-free house in Toronto.

“We are concerned with essentially sustaining our lifestyle to the end of the road,” Hank writes.

Hank and Caroline have put a down payment on a condo that is still under construction, with the balance of $1.2-million due in mid-2026. “We anticipate that this will be paid by the sale of our principal residence, with a balance left over to help finance our retirement lifestyle and the purchase of a new electric car,” Hank writes.

Hank has $1.7-million worth of assets in his professional corporation. “We expect to wind down the corporation to pay for our retirement over the next decade,“ Caroline writes. “If all goes well we would like to gift our sons $1-million each.”

Their questions: “How do we convert savings and investments into ongoing income?” Will this be enough to last them for 25 or 30 years? Their retirement spending goal is $120,000 a year after tax.

We asked Matthew Ardrey, a certified financial planner and portfolio manager at TriDelta Private Wealth in Toronto, to look at Hank and Caroline’s situation. Mr. Ardrey also holds the advanced registered financial planner (RFP) designation.

What the Expert Says

Hank is now working half-time and his earnings have been reduced to $100,000 a year, Mr. Ardrey says. Caroline is taking her Canada Pension Plan benefits of $12,000 a year and will take Old Age Security benefits at age 65. Hank will take full CPP and OAS at age 70.

Hank is the owner of a corporation valued at $2.3-million with the following assets: $320,000 condo down payment; $600,000 condo for son; $500,000 cash and equivalents; and $900,000 owed to the corporation by a former shareholder.

The son’s condo is not included in the retirement projection because it is not their intention to use this asset, the planner says. The $320,000 condo down payment will be paid out in June, 2026, when the condo purchase is scheduled to close. “The $500,000 we assume is invested in the same manner as the rest of their investments,” Mr. Ardrey says. The $900,000 is expected to be fully repaid by 2030. “We assume equal increments of $150,000 a year, with the funds being invested along with the existing $500,000.”

Hank is contributing $1,000 a month to his registered retirement savings plan, but this will end when he retires. They also save $500 a month in their respective tax-free savings accounts.

Excluding their emergency fund, their asset mix is 2 per cent cash, 16 per cent GICs, 19 per cent fixed income and 63 per cent in equities. The equities have a Canadian tilt, with a geographic division of 50 per cent Canada, 30 per cent U.S. and 20 per cent international.

“Their asset allocation is very close to what a balanced mix would be, and would make sense for a couple entering the retirement phase of their life,” Mr. Ardrey says. “The concern is in the underlying investments.” Seventy per cent of the investments are in A Class or deferred sales charge (DSC) mutual funds with management expense ratios in excess of 2 per cent.

“In fact, 28 per cent of the total portfolio has an MER above or close to 2.5 per cent,” the planner notes. Though this asset mix historically has earned a projected return of 5.04 per cent, it has an overall MER, when all assets – even those with no MER – are considered of 1.54 per cent. “This leaves them with a net projected return of 3.5 per cent,” he says.

Hank and Caroline would like to give a substantial gift to each of their sons. “I started with a gift of $1-million in total, or $500,000 each, in 15 years’ time,” the planner says. He based his calculation on the assumption of steady returns over time, known as a straight-line projection, where a forecast needs to be at least 100 per cent to succeed. “With this amount of a gift, the scenario does fall short, with only 95 per cent success,” he says.

“Life and investments rarely ever move in a straight line,” Mr. Ardrey says. “To ensure the viability of this plan, we stress test it by using a Monte Carlo simulation, which introduces randomness to a number of factors, including returns,” he adds.

For a plan to be considered likely to succeed by the program, it must have at least a 90-per-cent success rate, meaning at least 900 trials out of 1,000 succeed. If it is below 60 per cent, then it is considered unlikely to succeed. Between the two is somewhat likely.

With the gift of $500,000 each, the probability of success is 40 per cent, and so is “certainly not a viable option,” the planner says.

“If we cut the gift in half to $250,000 each, then the straight-line success rate increases to 109 per cent, but the Monte Carlo volatility analysis still remains only somewhat likely at 69 per cent,” Mr. Ardrey says. “This does not make their retirement plan work,” he says. “We are missing the vital component of helping their children out.”

The planner offers some recommendations that will improve their situation.

“First, we need to move them out of the 2-per-cent-plus investment cost portfolio,” Mr. Ardrey says. “They can improve their investment strategy and lower their costs by engaging the services of a portfolio manager with a focus on income generation,” he says. “There are many solid investment options with strong yields that when combined with some moderate growth can be expected to earn returns in the 6-per-cent range, net of fees.”

For example, a portfolio with a 4-per-cent to 4.5-per-cent yield net of fees only needs growth of 1.5 per cent to 2 per cent a year to make up the 6 per cent, “which I believe is very achievable.” This can be done in such a way that they lower their volatility risk, which also improves the Monte Carlo analysis results, the planner says.

Next, they should be maximizing their tax-free savings account contributions. They are only making contributions of $6,000 a year each when the current limit is $7,000.

With these changes in place, Mr. Ardrey revisited the $1-million in total or $500,000 each gifting scenario and found that they could complete this with a 100-per-cent probability of success with the Monte Carlo simulation and a 135-per-cent success in the straight-line plan. “I further pushed the $2-million gift ($1-million each) and the straight-line plan dropped to 109 per cent success and the volatility analysis showed a probability of success of 93 per cent,” the planner says. “So, it is still very possible to achieve.”

Client Situation

The People: Hank, 69, Caroline, 64, and their two sons.

The Problem: Can they retire comfortably and still give substantial advance inheritances to their children? What is the most tax-efficient way to draw down their savings?

The Plan: Take steps to lower investment fees. This will allow them to give money to their two sons. Draw income first from the corporation, then from their RRIFs.

The Payoff: A realization of what a big difference better returns and lower fees can make on a financial plan.

Monthly net income: $9,500.

Assets: Cash and GICs $67,000; corporation $1,700,000; her TFSA $83,000; his TFSA $111,000; her RRSP $500,000; his RRSP $500,000; child’s registered disability savings plan $60,000; residence $2,200,000. Total: $5.2-million.

Monthly outlays: Property tax $640; water, sewer, garbage $85; home insurance $135; electricity $90; heating $270; maintenance, garden $440; transportation $1,070; groceries $800; clothing $190; gifts $400; charity $170; vacation, travel $1,000; dining, drinks, entertainment $950; personal care $20; golf $50; pets $170; sports, hobbies $120; subscriptions $165; drugstore $125; life insurance $275; phones, TV, internet $300; RRSPs $1,000; registered disability savings plan $125; TFSAs $1,000 Total: $9,590.

Liabilities: None.

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

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