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Brenda and Burt.Cole Burston/The Globe and Mail

Burt and Brenda are clear about what they want to do when they retire from work in mid-2021. He is 58 and she is 61. They plan to sell their house in the Greater Toronto Area, move to their recreational condo and travel extensively. The sale of their house will leave them with a pile of money.

“How do we best invest the $850,000 of net proceeds from the residence sale to generate a reliable and tax-efficient annual cash flow?” Burt asks in an e-mail. They also wonder when to begin collecting government benefits with a view to having “a secure cash flow in later retirement.”

Burt earns $264,000 a year in high-tech, while Brenda earns $93,000 a year in education. They already have substantial savings. Brenda will be entitled to a defined benefit pension, indexed to inflation, of $22,500 a year at the age of 62 (with bridge benefit), falling to $19,500 at the age of 65.

Brenda and Burt have two children, both in their early 20s. Key to their plan is to give their children a solid financial footing – an advance on their inheritance – and perhaps help them with a down payment on a house “if it is financially feasible.”

The couple’s retirement spending goal is $85,000 a year after tax.

We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Brenda and Burt’s situation.

What the expert says

Burt and Brenda are confident they’ll be able to achieve their goals, but they want to double-check to see whether there are any steps they could be taking to make things even better for themselves and their children, Mr. MacKenzie says.

When Brenda and Burt sell their house, they’ll be adding $850,000 to their existing $250,000 non-registered portfolio. “This, combined with their registered funds (registered retirement savings plans and tax-free savings accounts), will give them a total investment portfolio of just over $2-million.” Burt is a do-it-yourself investor who is targeting an annual rate of return of 4 per cent.

It’s important that they invest the sale proceeds prudently in a balanced and diversified portfolio that takes into account their existing investments.

Looking at their existing portfolio, both registered and non-registered, “they have a reasonable asset mix (66 per cent in equities), but it is heavily concentrated in just a few stocks,” Mr. MacKenzie says. This is especially true of Burt’s non-registered account, which is mostly invested in shares of his employer.

They have about 17 per cent in cash that they are waiting for an opportune time to invest. “They plan to invest mostly in Amazon, Facebook and a Vanguard ETF,” he says. “Such a heavy concentration in a small number of equities, primarily in the high-tech sector, suggests they may be taking more risk than necessary,” he says. After they invest their cash, they’ll have more than 80 per cent in a highly concentrated equity portfolio, leaving them vulnerable to events like this week’s sudden market drop.

They could lower their portfolio’s volatility and potentially improve their rate of return to 5 per cent on average, net of fees, if they chose an asset mix consisting of 20-per-cent bonds, 15-per-cent private debt funds, 15-per-cent private equity funds and 50 per cent in publicly traded, blue-chip dividend-paying equities, Mr. MacKenzie says.

“Given the size of their portfolio once the $850,000 is added in, and a 30-year time frame, if they increase their average rate of return from 4 per cent to 5 per cent, they would increase the size of their estate by over $700,000 in after-tax dollars with today’s purchasing power.”

Looking over their assets, the planner adds that Burt’s RRSP is much larger than Brenda’s, but in this case, that makes sense, he says. Normally, it would make sense for the high-income earner to make contributions to a spousal RRSP, “but in this case, Burt has wisely contributed to his own RRSP,” Mr. MacKenzie says. This is the most tax-efficient strategy because when they retire, Brenda will be receiving a pension and their taxable income will be approximately equal, he says.

Burt and Brenda are well positioned to distribute some of their assets to their children sooner rather than later, Mr. MacKenzie says. By the time they’re 70, when they both will be collecting Canada Pension Plan and Old Age Security benefits, the value of their registered and non-registered accounts is forecast to have risen from $2-million to $2.4-million. They would have about $1.2-million in their RRSPs growing at an average 4 per cent a year – more than they will be taking into cash flow. Hence their investment earnings, including surplus RRSP earnings not taken into cash flow, will be about $95,000 a year.

“With these investment earnings, plus CPP of $40,000 after inflation, OAS of $18,000 and Brenda’s indexed DB pension of $24,000, their total earnings are estimated to be about $177,000 a year,” he says. By that time, their spending (including income tax) will be $125,000 a year. With income surpassing expenses, their net worth will continue to grow.

They are planning to give their children enough money to contribute the maximum allowable to their TFSAs and RRSPs, Mr. MacKenzie says. “They expect this will amount to about $30,000 a year, and they plan to do this for the next five years.” In five years time, they intend to update their financial plan. “If they are still projecting a substantial surplus, they plan to help their children get into the real estate market by giving them down payments for their first homes,” he says. His forecast shows they could afford to give each child a down payment of $100,000.

“This strategy gives the parents the joy of seeing the good they can do,” the planner says – and it allows them to see whether the inheritance advance is being used wisely. It also gives the children a chance to learn about investing their TFSA and RRSP funds by making their mistakes with relatively small amounts.


Client situation

The people: Burt, 58, Brenda, 61, and their two children

The problem: How to invest the proceeds of their house sale to achieve their financial goals, including giving some money to their children to help them get established.

The plan: Rethink their investment strategy. Their holdings are too risky because they are not sufficiently diversified. Develop a balanced, diversified portfolio. Give the children an advance on their inheritance as planned.

The payoff: All their goals achieved.

Monthly net income: $20,250

Assets: Non-registered, including cash $250,000; his TFSA $80,000; her TFSA $80,000; his RRSP $700,000; her RRSP $80,000; residence $900,000; estimated present value of her DB pension $350,000; recreational condo $285,000. Total: $2,725,000

Monthly disbursements: Mortgage $3,030; condo fee $400; property tax $630; home insurance $105; utilities $275; maintenance $530; vehicle lease $360; car insurance $225; fuel $240; maintenance, parking $80; grocery store $800; clothing $250; gifts, charity $30; vacation, travel $770; personal care $90; dining, entertainment $570; golf $300; sports, hobbies $150; subscriptions $40; doctors, dentists $50; life insurance $140; phones, TV, internet $380; TFSAs $1,000; her pension plan contributions $835. Total: $11,280 Surplus of $8,970 goes to paying off mortgage on second property.

Liabilities: Mortgage on recreational property $200,000

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

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