Although they are both semi-retired, Adrian and Eloise are leaning in different directions. Eloise is 48 and can’t wait to quit work altogether, sell their $2-million Toronto home and move to a less-expensive location so she can pursue a lifelong passion full-time. Adrian is 60 and earning $75,000 a year in an entrepreneurial field that he has found both profitable and exciting. He plans to keep working for the foreseeable future.
“For the past 10 years or so, I’ve been working toward early retirement, which has always been my goal,” Eloise writes in an e-mail. When she and Adrian bought their first house together, she sold her condo to help with the down payment. “His career took off about a decade ago,” Eloise writes, and an investment windfall helped them pay off their mortgage. They manage their own $2.4-million investment portfolio and have been doing well in the financial markets, Eloise says.
“I am ready to retire now based on where our investments are at, and on the fact that we can fairly easily downsize our home,” Eloise writes. “Adrian is hesitant because he is fairly conservative by nature. … Since my retirement could potentially be 50 years long, he is concerned that we don’t have enough money saved,” especially if they need expensive home care late in life, she adds. “I’d love to find a smaller, quieter town where I can garden and work on my projects.” They’re considering moving either to the East Coast or to rural British Columbia. Their retirement spending goal is $100,000 a year after tax. They also plan a renovation to their existing house and a car purchase.
We asked Robyn Thompson, a financial planner and founder of Castlemark Wealth Management Inc. in Toronto, to look at Adrian and Eloise’s situation.
What the expert says
Adrian and Eloise have lifestyle expenses of $95,800 a year, or $125,800 including $18,000 a year in contributions to their RRSPs and $12,000 to their tax-free savings accounts, Ms. Thompson says. They wonder whether they can retire at Eloise’s age 50. Their investment portfolio is aggressive, with 75 per cent allocated to stocks, 13 per cent to fixed income and 12 per cent to cash, she says.
“Retirement for Adrian and Eloise is affordable within two years, but with a major proviso,” the planner says. “They will need to downsize their home by a minimum of $500,000.” That means the price they pay for their new place will have to leave them with $500,000 in today’s dollars before subtracting real estate fees, moving costs and the cost of new furniture and décor.
In preparing her plan, the planner included a $100,000 renovation, $50,000 every 10 years for a new vehicle, moving costs of $25,000 assuming an out-of-province move, and another $25,000 for furniture. As well, she factored in health care costs of an additional $60,000 a year for the last five years of their lives. “This assumes that they stay in their home and bring in care as needed rather than moving to a retirement community.” If care costs surpass this amount, they can draw on the equity in their home to fund additional expenses, the planner says.
She recommends they continue contributing to their TFSAs even after they are no longer working, using their non-registered assets to do so. “Shifting assets from a taxable environment to a non-taxable one is always advisable.” Because of their relatively low marginal tax rates, the planner finds only “a slight benefit” to continuing to contribute to their RRSPs over the next two years.
Her forecast assumes: annual RRSP contributions of $18,000 a year for two years; maximum TFSA contributions; a well-diversified, balanced investment portfolio growing, on average, by an annual 4.5 per cent net-of-fee return; and 2-per-cent inflation over their lifetime. Their RRSPs would grow to about $1.5-million by the time Eloise reaches age 65, and their TFSAs to about $985,000. Their non-registered assets are reduced to about $290,000 by the time Eloise is 65 since the couple needs to draw from these assets to fund living expenses. That leaves projected total investment assets of about $2.7-million at Eloise’s age 65. Assets would fall to about $1.9-million at her age 85 and to $350,000 at the end of the planning period, Eloise’s age 95.
Once they have retired from work, Adrian and Eloise should consider converting their RRSPs to registered retirement income funds prior to the government-mandated age of 71, Ms. Thompson says. “They also have the option of withdrawing from their RRSPs instead of converting to a RRIF right away,” the planner says. “This will allow them the flexibility to withdraw funds on a discretionary basis based on tax efficiency.”
Earlier RRSP/RRIF withdrawals may result in reduced taxes payable over their lifetime because they have the opportunity to take advantage of lower tax rates in the early years of retirement before they apply for Canada Pension Plan and Old Age Security benefits, she says.
“For now, barring a shortened life expectancy, I would discourage the couple from taking early Canada Pension Plan benefits” because of the reduced payout, Ms. Thompson says. Deferring CPP and OAS benefits beyond age 65 may make sense, she says. OAS payments increase 7.2 per cent for every year they are deferred from age 65 to age 70 to a maximum of 36 per cent, while CPP payments increase by 8.4 per cent a year to a maximum of 42 per cent.
Although Adrian and Eloise have done well with their investments, the planner recommends they review their strategy with a financial professional to ensure it meets their goals and objectives. Such a high weighting in stocks “can cause problems in a retirement decumulation strategy,” she notes. She recommends they set aside enough cash and fixed-income securities to fund three to five years of withdrawals so they won’t be forced to sell stocks during a market downturn.
As they grow older, Adrian and Eloise “should look to a discretionary portfolio manager to manage their investment holdings,” Ms. Thompson says. “This will reduce the temptation and pressure to continually try to stay on top of markets in volatile times.”
The people: Adrian, 60, and Eloise, 48
The problem: Can Eloise afford to quit work entirely in a couple of years assuming they sell their Toronto house and move to a less-expensive locale? Will they have enough for health care if needed in their old age?
The plan: Continue contributing to their TFSAs. Downsize and add the net proceeds to their investment portfolio. Consider drawing on their RRSPs/RRIFs when they retire early and before they begin collecting government benefits.
The payoff: Some flexibility when it comes to retirement planning
Monthly net employment income: $9,250
Assets: Joint bank $97,500; her bank $31,200; his bank $49,500; joint non-registered stocks $876,600; his stocks $142,700; her TFSA $119,100; his TFSA $183,100; her RRSP $419,500; his RRSP $461,400; residence $2-million. Total: $4.4-million
Monthly outlays: Property tax $550; home insurance $90; water, sewer, garbage $95; electricity, heat $260; maintenance, garden $750; parking, transit $100 (Adrian’s company covers his car expenses); groceries $1,000; clothing $135; gifts $500; charity $600; vacation, travel $340; other discretionary $575; dining, drinks, entertainment $1,125; personal care $200; pets $135; sports, hobbies $380; subscriptions $175; other personal $100; health care $370; life insurance $115; communications $395; RRSPs $1,500; TFSAs $1,000. Total: $10,490
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