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Gertrude’s desired after-tax retirement budget is $65,000 to $70,000 a year, but with no workplace pension, her investments have to last a lifetimeTodd Korol/The Globe and Mail

After a spell of discouraging stock market performance, Gertrude wonders if she has enough savings and investments to retire in the next two or three years.

She’s thinking of leaving behind her $175,000 a year executive job in the Alberta oil patch – or “maybe not if I’m still having fun,” she writes in an e-mail. Gertrude is age 58 and single again. Her daughter, who is 23, is living at home while she completes her studies.

Gertrude’s desired after-tax retirement budget is $65,000 to $70,000 a year, but with no workplace pension, her investments have to last a lifetime.

“My portfolio has been flat for two years,” Gertrude writes. She moved her portfolio from one major investment dealer to another when the stock market was high “and then, of course, it fell shortly thereafter,” she adds. “I’m not sure if it’s that I don’t have the right asset mix or if it’s the manager – or neither and it’s just bad luck.”

We asked Clay Gillespie, a financial planner and portfolio manager at RGF Integrated Wealth Management in Vancouver, to look at Gertrude’s situation. Mr. Gillespie holds the certified financial planner (CFP) and chartered investment manager (CIM) designations.

What the Expert Says

Stock markets around the world performed very well in 2021 and very poorly in 2022, so Gertrude should not be surprised that her returns were flat, Mr. Gillespie says. “There have been only four times since 1928 that fixed income [bonds] and equities [stocks] have been down in the same year,” he says. “Even balanced portfolios had a difficult time in 2022.”

One of the greatest risks in retirement planning is having the stock market drop substantially just before or just after you retire, the planner says. “I would suggest that she start adjusting her portfolio to be ready for generating her desired retirement income.”

The timing of returns in retirement can actually be more important than the long-term return on your invested capital, Mr. Gillespie says. “This is called sequence of returns risk. Negative returns early in retirement can have a dramatic or even catastrophic effect on your ability to generate your retirement income through your retirement years.”

Gertrude’s first step should be to decide how much money she needs to redeem from her portfolio to generate her desired income. This will be a combination of withdrawals from her registered funds, earnings from her non-registered funds and possibly some return of capital. “She wants to make sure she uses the marginal tax brackets to her advantage. You never want to miss using a low tax bracket while generating your income,” the planner says.

He recommends the following strategy: Invest one year’s income in a high-yield savings account that will be used for the first year’s income, one year’s income in a one-year guaranteed investment certificate and one year’s income in a two-year GIC.

“She should then invest the balance of her investments in a growth portfolio based on her risk tolerance,” Mr. Gillespie says. She should also draw up an investment policy statement that spells out how her funds should be invested.

The rationale behind this strategy is that the high-yield savings account will deplete itself over the first year. After the first year, if the growth part of the portfolio has risen in value, then take the following year’s income from the growth portion (that is, use some of the growth part of the portfolio to replenish the high-yield savings account).

If, however, the stock market performs poorly and the growth account decreases in value, then use the maturing GIC to replenish the high-yield savings account. If the GIC is not used for income, it will be reinvested for a guaranteed period of two years.

“In the years when the market earns extraordinary returns, not only should you use this growth for income purposes, but you should also take additional funds from the growth account to purchase additional GICs to fund your income the next time the stock market is down in value,” the planner says. “This strategy only works because you avoid taking income from any part of your portfolio that is declining in value.”

Gertrude’s retirement spending goal is $70,000 a year after tax and inflation. “If the income was fully taxable, this represents a gross pretax income of about $95,000 a year,” the planner says. “I would suggest that Gertrude withdraw $40,000 a year from her registered funds and generate the remainder of the income from the earnings in her non-registered accounts.”

Based on Mr. Gillespie’s analysis, though, Gertrude should be able to generate a net spendable income (after tax and inflation) of about $97,000 a year until she is age 95 – well above her target. This assumes that she earns an annual rate of return of three percentage points more than the inflation rate.

“She can generate more than her desired retirement income. So, if she continues to work, she’s working because she wants to work, and not because she needs to work,” he says.

He did not include the equity in her principal residence in this calculation. “This gives her the flexibility of staying in her house or moving into a new type of living environment in retirement,” the planner says.

He suggests Gertrude defer her Canada Pension Plan and Old Age Security benefits to age 70. She will need to withdraw significantly more from her investment assets in the first 10 years because of these deferrals.

In mid- to late retirement, “we like to see day-to-day living expenses met by government pensions, company pensions or a life annuity,” the planner says. These programs increase with the rate of inflation and are the best forms of longevity protection we have in Canada,” he says. “You cannot outlive these funds – and they don’t need to be managed.”

“We believe the best time to buy a life annuity is in your mid- to late 70s,” he says. He recommends using registered funds such as RRSPs to do so.

“Use up registered funds first because they are fully taxed on your death,” Mr. Gillespie says. For example, if Gertrude died today, her entire RRSP balance would be taxed as income, with up to 50 per cent going to the government. (It would pass tax deferred to a spouse.) “You want to redeem your registered funds over your lifetime if possible.”

“At Gertrude’s age 70, we estimate that her government benefits and registered funds (in the form of a life annuity) could generate gross income of about $72,000 a year, about three-quarters of her desired income,” he says. She could then use the non-registered funds “to fight off the effects of inflation over time.”

Client Situation

The Person: Gertude, 58, and her daughter, 23.

The Problem: Can Gertrude afford to retire in a couple years if she chooses to? Is her portfolio properly invested?

The Plan: Draw heavily on her registered savings early in retirement, deferring government benefits to age 70. Because she has no company pension, she should use some of her savings to buy a life annuity in her mid- to late 70s. Start readying her portfolio to provide the income she will need.

The Payoff: Peace of mind.

Monthly net income: $9,145 (excludes variable bonus).

Assets: Cash $15,000; non-registered stock portfolio $616,000; mutual funds $394,810; U.S. mutual funds $150,000; TFSA $96,000; RRSP $641,000; residence $700,000. Total: $2.6-million.

Monthly outlays: Property tax $420; home insurance $100; electricity $110; heat $285; security $65; maintenance, garden $115; transportation $225; groceries $1,000; clothing $200; house cleaners $185; gifts, charity $75; vacation, travel $835; other discretionary $100; dining, drinks, entertainment $125; personal care $230; club membership $100; exercise class $150; subscriptions $55; health care $75; life insurance $210; TV, phone, internet $225; RRSPs $2,335; TFSA $540; mutual funds $2,085. Total: $9,845.

Liabilities: None.

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

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