Randy and Ruth are in their early 50s with two children in university, well-paying careers and a house in the Toronto area that will be mortgage-free in four years.
Randy earns $157,000 a year in financial services, while Ruth earns about $100,000 a year teaching. As a teacher, Ruth has a defined benefit pension plan that will pay $58,311 a year starting at age 55.
Their goal is to retire – first Ruth, then Randy – and “travel the world,” Randy writes in an e-mail, taking at least one overseas trip each year. As well, they’d like to winter abroad, perhaps in Portugal or Spain, Randy adds.
“Like everyone else, my [registered savings] have taken a hit due to the pandemic,” Randy writes. At the low point, March 23, Randy’s portfolio was down about 22.5 per cent, or $205,000 for the year, but it bounced back and is now down 7.5 per cent, or $68,000.
“Can we still afford to achieve all of our goals and be able to retire when we would like to?”
The plan is for Ruth to retire at age 55 and Randy at age 56 with $90,000 a year after tax.
We asked Michael Cherney, an independent Toronto-based financial planner, to look at Ruth and Randy’s situation.
What the expert says
“These two are in a wonderful position,” thanks in part to Ruth’s teacher’s pension, Mr. Cherney says. For Randy’s part, he earns a top salary and has the benefits of a defined contribution pension plan, the value of which depends on financial markets.
“Randy and Ruth love to travel, and at the ages of 52 and 53, respectively, are eyeing the exits,” Mr. Cherney says. The plan is to start “an annual tradition of river cruises and other exciting adventures in Europe,” the planner adds. Their children are 22 and 18, and between registered education savings plans and summer jobs, their postsecondary education is paid for, he says.
“The couple have expressed the hope that Ruth can retire in August, 2021, at the magic number of 85, which represents her age at that point – 55 – plus years of service,” Mr. Cherney says.
Randy would like to work a bit longer in order to cover their expenses – their mortgage matures in March, 2024 – as well as to sock away a bit more money for their retirement.
“The couple were steadily moving toward achieving their financial goals,” the planner says. Then COVID-19 hit. To assess the damage to their “financial dreams,” Mr. Cherney did a projection using the following assumptions:
Ruth retires on Sept. 1, 2021, with a pension of $58,311 a year. This represents an income drop of about $41,630 before payroll deductions, pension plan contributions and group benefits, “but only about $1,062 a month ($12,744 a year) after all these deductions,” the planner says. If they want to make up the difference, they’ll have to trim their spending – groceries and dining out would be a good place to start.
He assumes Randy retires on April 1, 2024, the day after their mortgage matures.
When they retire from work, they immediately convert their registered retirement savings plans and Randy’s locked-in retirement account (LIRA) to registered retirement income funds (RRIFs) and a life income fund (LIF). They withdraw just enough to meet their income needs. They split Ruth’s pension income immediately (allowed at any age because it is from a pension) and Ruth takes the federal pension tax credit of $2,000. Upon each turning 60, they take reduced Canada Pension Plan benefits.
The planner assumes their investments return 4.5 per cent a year on average, the inflation rate averages 2.5 per cent and they live to age 95.
“The result is that they can achieve the $90,000 after-tax (2020 dollars) with some room to spare,” Mr. Cherney says. They could spend up to $95,000 a year, though the planner cautions against this.
The question arises whether they should change their planning given the uncertainty surrounding COVID-19, he says. “Much of the couple’s income is guaranteed, namely Ruth’s pension but also their CPP and Old Age Security benefits,” he says. “That provides a cushion of security.”
However, they will be drawing from RRIFs, Randy’s LIF and their tax-free savings accounts for a substantial portion of their incomes, especially in the years before CPP and OAS begin, the planner says. “Accordingly, out of an abundance of caution, I would suggest that they consider raising their cash allocations, not by selling current investments at a loss, but by putting all new contributions into high-interest savings accounts instead of market-based investments.”
“Some might argue that this goes exactly against the mantra of buying low and selling high,” Mr. Cherney says. But they already have more than $900,000 in marketable securities.
Having more cash would increase their security, “which is crucial,” the planner says. “Among the greatest risks associated with drawing income from a market-based account is sequence of return risk, which penalizes investors who suffer market lows in the earlier years of their retirement.”
In four years, the couple will have a mortgage-free house currently valued at $900,000, the planner says. “This asset provides further flexibility to access equity. And if they don’t need it, it will provide a tax-free inheritance for the kids.”
The people: Randy, 52, and Ruth, 53
The problem: Can they still afford to retire in their mid-50s and travel even though Randy’s investments are down?
The plan: They’re in great shape so they can retire and split Ruth’s pension. Put new contributions to retirement savings in cash equivalents to lower sequence of return risk.
The payoff: Goals they’ve worked hard for achieved.
Monthly net income: $14,660
Assets: His LIRA $541,795; his TFSA $33,435; her TFSA $19,340; his RRSP $172,255; her RRSP $46,920; his DC pension plan $114,855; commuted value of her DB pension plan $1.3-million; RESP $46,070; residence $900,000. Total: $3.17-million
Monthly outlays: Mortgage $2,260; property tax $535; home insurance $90; utilities $320; maintenance, garden $60; car insurance $430; fuel $525; maintenance, parking, transit $250; groceries $1,595; clothing $300; vacation, travel $135; dining, drinks, entertainment $1,200; personal care $95; club memberships $115; pets $165; subscriptions $30; doctors, dentists $150; life insurance $150; cellphones $160; TV, internet $240; RRSPs $450; RESP $390; TFSAs $600; pension plan contributions $1,725. Total: $11,970. Surplus of $2,690 goes to savings or unallocated spending.
Liabilities: Mortgage $102,750
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Some details may be changed to protect the privacy of the persons profiled.
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