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Mike and Marilyn.Justin Tang/The Globe and Mail

When Mike and Marilyn first wrote to Financial Facelift, they asked whether they were on track to retire in a couple of years. Neither has a company pension.

In November, at the time they wrote in, their savings and investments were worth about $980,000. Now they’re worth $114,000 less. Marilyn is 57 and earns $105,000 a year, Mike is 58 and earns $50,000.

They had hoped to quit working at age 60, but – like so many Canadians – their early-retirement dreams are fading. Planning has become difficult, if not impossible, because of turbulence in financial markets.

When they retire from work, Marilyn and Mike hope to take a couple of big trips with their teenage son before he goes off to university. They want to help their only child with university costs and perhaps graduate school. Later, they want to help him with the purchase of a first home.

They ask whether their investment fees are reasonable or if they should take steps to lower them. “We have put all our financial decisions in the hands of others, and we would like some assurance that the best decisions have been made,” Marilyn writes in an e-mail. As well, they have some cash they’re wondering how to invest.

Their retirement spending goal is $70,000 a year after tax, plus another $10,000 a year for travel. “Do we have enough to live into our 90s and to leave some for our son?” Marilyn asks.

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

What the expert says

“To a large degree, the answer depends on the real rate of return they’ll earn on their investments over the next 30 or 40 years,” Mr. MacKenzie says. “If their portfolio falls much further, and if at the bottom of the market they needed to begin withdrawing funds to maintain their lifestyle, they could run out of money in their early 80s.”

Even assuming stock markets deliver the same rate of return as they have over the past decade, if Mike and Marilyn retire at age 60, they’re likely to run out of savings in their early 90s, the planner says. This assumes an average rate of return of 5 per cent a year with an inflation rate of 2 per cent. Given the history of longevity in their families, Mr. MacKenzie suggests they try to plan for their savings lasting to age 100. They will also have to plan for potential nursing home costs in their old age.

So before they quit their jobs, they will need to update their financial plan. “While they may hope to retire by age 60, it may be more prudent to delay retirement to age 65.”

Next, he looks at the couple’s investments and associated fees. Marilyn and Mike are paying 1.77 per cent in investment management fees. With an asset mix of 45 per cent equities and 55 per cent fixed income, they’ve earned an annualized rate of return of 6.8 per cent over the past five years.

“It should be noted that stock markets have yielded higher-than-average returns since the bull market started in March, 2009,” the planner says. This includes the five exceptionally good years ending in February, 2020. “If we are now entering a bear market, we should assume lower rates of return for the next decade.”

After the first down leg of the recent market correction, following a discussion with their adviser and believing that the market had hit bottom, Marilyn and Mike moved from a 45 per cent equity position to 50 per cent, Mr. MacKenzie says.

The key now is for Marilyn and Mike to monitor their investments and keep their plan current so that they don’t end up working longer than necessary or worse, retiring too soon, he adds. "It would be a disaster if they retired too soon, so it is of vital importance that they keep their financial plan up-to-date,” he adds. The best way for their adviser to add real value is to give them the information they will need to make the right decisions.

Marilyn and Mike wonder how to invest the cash they have on hand. Given the volatility of the market, and the fact they are investing for the long term, “it would make sense that they use dollar-cost averaging,” the planner says. They should start by investing in their tax-free savings accounts, he adds.

To minimize income tax when they retire, they should arrange for each of them to have about the same level of income, the planner says. Marilyn, who has earned the higher income, has been contributing to a spousal registered retirement savings plan for Mike. In doing so, “they’ve tried to equalize the size of their investment portfolios,” the planner says. In retirement, if Marilyn pays most of the expenses, Mike could save his Old Age Security and Canada Pension Plan benefits. Over time, the additional investment Mike would earn on these savings will help equalize their taxable income.

Whether they retire at 60 or 65, their taxable income will be lowest in the first few years. They should convert their RRSPs to registered retirement income funds and begin withdrawing from the RRIFs for a portion of their cash-flow needs, Mr. MacKenzie says. By doing so, they’ll enjoy the benefit of the $2,000 federal pension tax credit.

His forecast has them drawing $30,000 each from their RRIFs, with the remainder of their cash-flow needs coming from interest, dividends and capital in their non-registered accounts.

Client situation

The people: Marilyn, 57, and Mike, 58

The problem: Can they afford to retire in a couple of years with $70,000 after tax plus another $10,000 for travel?

The plan: Consider working to age 65, all the while updating their financial plan to reflect the then-current value of their savings and investments.

The payoff: Achieving their most important financial goals.

Monthly net income: $9,155

Assets: Cash reserve for son $50,000; cash reserve for travel $43,000; savings to invest $110,000; her RRSP $282,000; his RRSP $333,000; his spousal RRSP $72,000; her TFSA $59,000; his TFSA $62,000; registered education savings plan $85,000; residence $600,000. Total: $1.7-million

Monthly outlays: Property tax $335; home insurance $95; utilities $245; maintenance $300; garden $50; transportation $440; groceries $1,200; clothing $150; gifts, charity $160; vacation, travel $800; other discretionary $500; personal care $100; club membership $70; dining, entertainment $300; sports, hobbies $435; subscriptions $35; health care $75; life insurance $470; phones, TV, internet $350; RRSPs $1,500; TFSAs $800; other savings $700. Total: $9,110

Liabilities: None

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