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Tijana Martin/The Globe and Mail

With plenty of savings and a valuable house in Toronto, Arthur and Elena are thinking of downsizing, beefing up their investment portfolio and giving substantial sums to each of their two children for a down payment on a first home. Arthur, who is 57, wants to retire from his $250,000-a-year job in a year or so. Elena, who is 58, is no longer working. Both have had lengthy management jobs in the health care field.

Their tentative plan is to sell their city house, buy a smaller place and spend more time at their country house in Quebec. Arthur might look for part-time work in the same field or do something entirely different, he writes in an e-mail. They also want to get more involved with their community, do some volunteering, and travel more.

Both have locked-in retirement accounts (LIRAs) from previous employers and Arthur has a defined-benefit pension plan. They wonder which accounts they should draw from first, what tax strategies they might use to keep income tax to a minimum and when to start taking Canada Pension Plan and Old Age Security benefits.

Their after-tax spending goal is $120,000 a year, indexed to inflation. “Are we able to retire in 2023 and pursue more part-time work or volunteering?” Arthur asks.

We asked Matthew Sears, a vice-president and financial planner at T. E. Wealth in Toronto, to look at Arthur and Elena’s situation. As well as being a certified financial planner, Mr. Sears holds the chartered financial analyst, or CFA, designation.

What the expert says

If they sell their $3-million house when Arthur retires, buy a less expensive one and have $1-million left to invest and give to their children, Arthur and Elena likely will achieve their goals, Mr. Sears says – assuming they earn an average rate of return of 5 per cent on their investments.

Other assumptions in the planner’s base case scenario include that they live to age 95, inflation averages 2.2 per cent a year, they defer government benefits to age 70 and they each continue to contribute $6,000 to their tax-free savings accounts for the rest of their lives. Under these assumptions, Elena and Arthur would leave investment assets of $673,000 as well as their home and country home to their children.

If their investment returns are lower – 4 per cent or even 3 per cent – Arthur and Elena would have to make some adjustments, Mr. Sears says. They would have to work longer, work part-time or consider eventually selling the downsized city home in 10 years or so – something they are already considering – and either rent or move to their country home, the planner says.

With a 4-per-cent return, and living in Toronto, Arthur would have to work two more years, he says. With a 3-per-cent return, he’d have to work three more years. “The other alternative would be to sell the city property in 10 years,” Mr. Sears says. This big inflow of cash would allow them to achieve their retirement goals even if they have disappointing returns, he says.

Under the base case scenario, with 5-per-cent investment returns, they should be able to give their children $250,000 each and still meet their retirement spending goals, the planner says. With a lower rate of return, “they would have to make an adjustment to their retirement date or spending.”

Next, the planner looks at the couple’s investments and how they might be drawn down. In the early years, before Arthur begins drawing his pension at age 65, they will be living solely off their portfolio, which has a mix of 60 per cent stocks and 40 per cent fixed income. Of the $1-million left over from the sale of their house, “half of those funds are expected to be used over the next five years to provide their children with a down payment,” the planner says. The down payment funds should be set aside in a safer investment than the stock market to ensure they will be available when needed, he adds.

In the early retirement years, both Arthur and Elena should draw from some of their registered plans rather than using their cash on hand so they can smooth out their tax payments throughout their retirement and use up available tax credits, Mr. Sears says. They should use some of the house proceeds to top up their TFSAs.

The house sale will net them $500,000 each, half of which will go to their children for a down payment. To equalize their taxable investment funds, Arthur could give more than Elena. Arthur has $280,000 of investment assets in his name alone, so he could set aside $390,000 for the down payments from his $500,000 in house-sale proceeds and Elena $110,000. “This would then leave them each with $390,000 in their taxable accounts,” the planner says.

As well, they could convert their LIRAs to life income funds and begin drawing from them in the early years, unlocking 50 per cent of locked-in funds on conversion, Mr. Sears says. Half the LIRA funds will go to the LIFs and the other half would be transferred to their RRSPs. This will give them greater flexibility in managing their cash flow because they can withdraw more from their RRSPs/RRIFs than from their LIFs, which have maximum withdrawal limits.

Taxable income of $78,000 each would cover their expenses for the first full year of retirement (2024) and they’d be paying an average of about 20 per cent in income taxes, the planner says. Here’s how their pre-tax cash flow breaks down that year: $60,000 each from their registered accounts (the maximum from the LIFs topped up by withdrawals from their RRSPs), and $36,000 from their taxable account – roughly the forecast investment income generated that year. They’d pay about $30,000 in tax between them, Mr. Sears estimates.

By 2029, when Arthur begins drawing his defined-benefit pension, their lifestyle expenses will have risen to $139,745 with inflation. Their cash flow is as follows: $31,775 from Arthur’s pension; $22,000 from their taxable account; and $120,000 combined from their registered accounts. “The ability to pension split makes this much easier for them because they are now both age 65,” Mr. Sears says. They’d pay about $34,000 in tax between them, “maintaining about a 20 per cent average tax rate.”

In conclusion, Arthur and Elena have enough assets to retire and meet their lifestyle and gifting goals while still leaving a sizable estate, mainly real estate, for their children.

Client situation

The people: Arthur, 57; Elena, 58; and their two children, age 21 and 24

The problem: Can Arthur afford to retire in a year or so, help the children buy a first home and still meet their spending goal? How can they save taxes when they begin drawing down their savings?

The plan: Downsize the city house when Arthur retires. Target a 5-per-cent return on investments, failing which Arthur may have to work longer or they may have to pare their spending if they want to give the children $500,000. Tap some of their registered funds in the early retirement years.

The payoff: Effective management of their savings and the satisfaction of being able to help their children sooner rather than later

Monthly net income: $12,835

Assets: Bank accounts $7,000; stocks $180,000; mutual funds $100,000; his TFSA $50,000; her TFSA $60,000; his RRSP $409,000; her RRSP $291,000; her LIRA $233,000; his LIRA $627,000; estimated present value of his DB pension $628,000; registered education savings plan $39,000; country house $800,000; city house $3-million. Total: $6.4-million

Monthly outlays: Property taxes $1,080; water, sewer, garbage $110; maintenance, garden $200; property insurance $250; heat, electricity $260; vehicle insurance $500; fuel $400; other transportation $245; groceries $1,400; clothing $60; line of credit $1,000; gifts, charity $135; vacation, travel $1,200; dining, drinks, entertainment $1,000; personal care $70; club membership $50; golf $150; sports, hobbies $200; subscriptions $60; health, dental insurance $340; cellphones $380; phone, TV, internet $210. Total: $9,300. Surplus of $3,535 goes to paying down line of credit.

Liabilities: Line of credit $111,000

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