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Cynthia and Robert

Glenn Lowson/The Globe and Mail

It’s a dilemma many Canadians face as they near retirement – how much can they afford to spend without running out of money? So it is with Robert and Cynthia, a couple in their early 60s. Robert has already hung up his hat, leaving behind a sales job that earned him $150,000 a year on average. Cynthia is self-employed, earning $60,000 a year. She’s collecting a work pension and plans to retire fully this year. Together, they’re bringing in about $122,000 a year.

Their high-earning years enabled the couple to save a substantial sum in addition to their $1.4-million suburban Toronto home. They have no children so no concern about leaving a big estate.

“How should we allocate our resources so that we enjoy our money while we are young and healthy, but still have enough in case of extra needs when we are old?” Robert writes in an e-mail. “What assets should we draw on first and in what order?” he adds. “We have been very conservative and risk-averse with our investments,” Robert writes. “Is our portfolio suited for our needs?”

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Their aspirations include travelling in Europe each year until they are 80, maybe renovating their home and donating to charity.

We asked Cherise Berman, a financial planner and principal of Bespoke Financial Consulting in Toronto, to look at Robert and Cynthia’s situation. Bespoke is a fee-only and advice-only financial planning firm. In addition to her financial planning designations (certified financial planning and the advanced registered financial planner), Ms. Berman is a chartered professional accountant.

What the expert says

Robert and Cynthia have been spending $102,000 a year on average, including travel, and saving $12,000 to their tax-free savings accounts, Ms. Berman says.

“In retirement, they would like to increase their discretionary spending on travel, home renovations and charitable giving,” the planner notes. Their target spending is $130,000 a year. “They want to know if they can maintain this higher level of spending and still have enough assets for extra needs such as higher health costs and/or care in their later years,” she says. “They have no children – hence no one to look after them as they age – and need to be self-reliant.”

Cynthia’s pension plans and their government benefits will more than cover their fixed expenses when they retire, Ms. Berman says. Cynthia is getting $52,800 a year, indexed to inflation, from her defined benefit pension plan, plus a bridge pension of $10,000 a year to age 65. (She’ll be getting another, much smaller pension of $2,000 a year starting at the age of 65 from a former employer.) Robert has a locked-in retirement account (LIRA) from a previous employer. With inflation, their government benefits (Canada Pension Plan and Old Age Security) are estimated to be $20,700 a year for her and $21,400 for him starting at age 65, the planner says.

“They can comfortably increase their total spending to at least $130,000 a year and still have a cushion of retirement assets to fund extra needs, including health care costs if required,” she says. Her forecast assumes an average rate of return on their investments of 2-per-cent net of fees.

Although they could take CPP benefits sooner, Robert and Cynthia should defer them until the age of 65 to avoid the substantial penalty for taking them early, Ms. Berman says. She recommends they begin collecting OAS benefits at 65 rather than deferring them.

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“Although they can wait to age 70 and be eligible for more, OAS is income-tested and their combined incomes when they are in their 70s (CPP, pension plan and registered retirement income fund withdrawals) will exceed the OAS income limit and some would have to be repaid to the government.” She recommends they keep contributing to their TFSAs as long as they have non-registered assets to contribute. “Doing so will reallocate some non-registered savings to tax-free savings, which will be more tax-effective when they eventually withdraw these funds.”

Next, Ms. Berman looks at the couple’s portfolio, which they describe as “very conservative.” While they say they are risk-averse, they have 83 per cent of their investments in stocks, stock exchange-traded funds and stock index funds – investments more suitable for a growth investor, she says. “Robert recognizes that the high level of equities in their portfolio is not what one would expect from a conservative investor,” Ms. Berman says. “He says he has invested in equities rather than fixed-income assets simply because of a lack of attractive alternatives.”

Robert and Cynthia are taking on much more risk than they realize by holding so much of their portfolio in equities, “even though their portfolio includes blue-chip, dividend-paying stocks,” Ms. Berman says. “These are still risky.” They do not need to take unnecessary risk to meet their retirement goals, she adds. With an average rate of return of 2-per-cent net of fees, they still have a substantial cushion in their old age.

As to which pool of savings they should draw on first, “there is no simple strategy or rule of thumb. We need to analyze the sources and types of retirement income, identify a reasonable rate of return based on their risk tolerance, and consider income taxes,” Ms. Berman says. Based on Robert and Cynthia’s situation, they should start drawing from their non-registered portfolio in early retirement to supplement Cynthia’s pension income, the planner says. “They will be drawing down between $60,000 and $75,000 each year until their government benefits and RRIF payments start, she says. (RRSPs are converted to registered retirement income funds, or RRIFs, at the age of 71 and mandatory minimum withdrawals begin the year the taxpayer turns 72.)

“They should keep $250,000 in cash and short-term guaranteed investment certificates to bridge them until they start receiving these other income streams,” she says. They could put $75,000 in a high interest savings account to cover their retirement expenses for the first year, with the remaining $175,000 in one-year and two-year guaranteed investment certificates. The TFSAs should be left to continue to grow and used last, Ms. Berman says. “This will provide a tax-effective pool to tap into in their later retirement years for unexpected expenses and to fund potential health care needs.”

Client situation

The people: Robert, 61, and Cynthia, 62

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The problem: How much can they afford to spend without running out of money? Are their investments suitable? In what order should they draw their savings?

The plan: Set aside a cash buffer to tide them through until other income streams begin. Tap their non-registered portfolio first, leaving TFSAs as long as possible. Diversify investments to lower unnecessary risk.

The payoff: A better understanding of the “decumulation” process

Monthly net work and pension income: $8,480

Assets: Cash $32,000; short-term investments (GICs) $205,000; stocks $615,000; his locked-in retirement account $580,000; his TFSA $89,500; her TFSA $89,500; his RRSP $680,000; her RRSP $250,000; estimated present value of her DB pensions $1.3-million; residence $1.4-million. Total: $5.24-million

Monthly outlays: Property tax $585; home insurance $115; utilities $245; maintenance, garden $740; transportation $545; groceries $1,040; clothing $175; gifts, charity $815; vacation, travel allowance $835; dining, drinks, entertainment $570; personal care $415; sports, hobbies, club membership $310; subscriptions $55; health care $195; health insurance $215; communications $225; other $430; TFSAs $1,000. Total: $8,510

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Liabilities: None

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

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