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Bonnie and Ben.Justin Tang/The Globe and Mail

Bonnie and Ben have retired from the work force – Ben from the government and Bonnie from financial services – and are planning to spend more time travelling. Ben is age 71, Bonnie is 65. They have three children in their early 30s.

While they are not prosperous, Bonnie and Ben are comfortable, bringing in more than $80,000 a year before tax between the two of them in government benefits and pension income. Ben’s defined benefit pension is $37,290 a year, rising with inflation. Bonnie’s work pension is about $12,200 a year, not indexed to inflation. As well, they both get Old Age Security and Canada Pension Plan benefits.

“We currently rent an apartment which is well-equipped with many amenities,” Bonnie writes in an e-mail. They own a lakefront four-season cottage – a former second home – that they have decided to sell because they don’t use it much any more. They plan to spend $15,000 a year travelling for the next decade. They are concerned they may have to tap into their savings or spend some of the proceeds of the cottage sale to cover their lifestyle spending.

As well, they wonder how best to invest the net proceeds of the cottage sale, estimated at $450,000. “How much should we put aside for long-term care support if needed?” Bonnie asks. “Would I be able to keep up our standard of living if Ben should die and I lose half his pension?”

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

What the expert says

Ben and Bonnie have worked all their lives and managed their affairs wisely, Mr. MacKenzie says. “Now, as they start their retirement, although they are financially independent – that is, they have enough to retire and maintain their lifestyle – they lack financial security, or the confidence that they have enough to achieve all their goals,” he says. “No matter how well off people are, they can’t enjoy their retirement to the fullest if they don’t have confidence that they have enough.”

The good news, the planner says, is that based on an assumed 4-per-cent average rate of return and inflation of 2 per cent, they will have sufficient financial resources to maintain their desired lifestyle and achieve all their financial goals.

Their financial independence is largely based on their work pensions and government benefits, he adds. After they sell their cottage, their annual expense budget will be about $64,000 a year, excluding travel. Their $80,000 in pensions and government benefits are enough to cover lifestyle expenses and pay their income tax. Their travel money will come from investment income.

Bonnie asks whether they have enough to cover the costs if one or both of them needs to move to a nursing home at some point, Mr. MacKenzie says. On average, people live in a nursing home for less than three years before they die, he points out. If Ben and Bonnie were both in a nursing home, they would continue to receive their pensions. Their other living expenses would be very low.

“If we assume that the cost for each might be $4,000 per month, and they each live in the nursing home for five years, the total cost (tax deductible) would be $480,000,” Mr. MacKenzie says. Their pension income would be $400,000 over the same period. “If they put aside $100,000 from the proceeds of the sale of the cottage, this would be more than enough to cover the additional costs of a nursing home,” the planner says.

They also wonder whether Bonnie would be able to maintain the same lifestyle if Ben predeceased her and she received only half of his government pension and Canada Pension Plan benefits. “Given that some lifestyle expenses would be reduced after Ben’s death, our analysis shows that Bonnie would still be okay financially even if she eventually requires nursing home care,” Mr. MacKenzie says.

They expect to sell their cottage in 2021 and clear at least $450,000 after selling costs and capital gains tax, the planner says. Doing so will reduce their current annual expenses by $18,000 a year. After setting aside the $100,000 for health care later in their lives, they can add the balance to their long-term investments.

After some discussion of how to invest the money, the couple asked whether at some point before they pass away, they could afford to give each of their children an “inheritance advance” of $100,000. They have not yet decided whether to do so.

“They can afford to do this and it makes sense because it would allow the parents to enjoy seeing the good they can do, it would help the children when they most need the help, and it would reduce the possibility that their heirs will quarrel over what might be a larger estate,” Mr. MacKenzie says. And because giving the children some money would reduce the parents’ investment income, it would also lower their income tax liability and the possibility of having their Old Age Security benefits clawed back.

In terms of their investment strategy for their registered funds and the balance of the proceeds when the cottage is sold, Bonnie and Ben should be in a “goals based” asset mix, Mr. MacKenzie says. “This means taking as much risk as necessary to achieve all their goals – but no more.”

Their registered accounts are invested almost 100 per cent in guaranteed investment certificates, he says. “They have eliminated stock market risk, but they have increased their exposure to the risk of inflation, currency fluctuation, rising interest rates, and income tax – and they have reduced liquidity.” Given the security of their pension income, they should be able to accept some exposure to stock market risk.

He recommends they hire an investment counsellor, draw up an investment policy statement and develop a more diversified portfolio, including some exposure to private debt and equity funds. These offer the prospect of enhanced returns with lower volatility because they do not trade on public markets.

“They also need to be following a disciplined investment process because over the long term, following a disciplined process is more important than trying to find the best investment products,” Mr. MacKenzie says.

To minimize income tax, they should split their pension income, including income from registered retirement income funds, the planner says. They should also maximize their contributions to their tax-free savings accounts. Individuals who have never contributed to a aA can move $69,500 into the account. “To date, their only TFSA contribution was a $10,000 contribution made by Bonnie,” he says. As soon as money is available from the sale of the cottage, they should move about $129,000 into the two TFSAs. The income splitting, and the transfer of funds to their TFSAs, will minimize income tax and reduce the probability of losing some of their OAS because of the clawback, he says.

Client situation

The people: Ben, 71, Bonnie, 65, and their three children

The problem: Determining how far their savings and investments will go, how to invest the proceeds of the cottage sale, and how to keep income taxes to a minimum.

The plan: Set aside some money for health care later in life, take full advantage of their tax-free savings accounts and consider hiring an investment counsellor to build a more diversified portfolio.

The payoff: Confidence they can achieve their goals with no more worrying about financial security.

Monthly net income: $5,420

Assets: His RRSP $249,385; her RRSP and TFSA $177,340; funds in his corporation $38,000; recreational property $510,000; estimated present value of his DB pension $570,000; estimated present value of her DB pension $190,000. Total: $1.7-million

Monthly outlays: Rent $2,620; home insurance $40; hydro $40; transportation $360; groceries $550; clothing $100; gifts, charity $225; vacation, travel $50; cottage property expenses $1,500; dining, drinks, entertainment $600; personal care $85; doctors, dentists $135; club memberships $80; pets $50; subscriptions, other $145; phones, TV, internet $225. Total: $6,805

Line of credit: $40,000

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

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