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Serena, 54, and Sam, 63, wonder whether they’re sufficiently well-fixed that Serena can retire this spring when her contract expires.Christopher Katsarov/The Globe and Mail

Serena and Sam have reached a point in their lives when spending more time together, travelling and living well are taking on a certain urgency.

Part of the reason is the difference in their ages. Sam is 63 and has been retired from his government job for 11 years. His combined income from his defined-benefit pension and the Canada Pension Plan is $64,600 a year. Serena is 54 and still working, earning $115,000 a year on average from her own consulting business. They have substantial savings in various accounts and a mortgage-free house in suburban Toronto.

They wonder whether they’re sufficiently well-fixed that Serena can retire this spring when her contract expires.

Weighing on Sam, in addition to their age gap, is the shadow of his own mortality. He has asked the financial planner to assume a life expectancy of age 76 for him and 95 for Serena.

Their retirement spending goal is $120,000 a year after tax, in line with their current lifestyle. “Does Serena have to work beyond this spring to meet our goals?” Sam asks. “Will we be able to increase our travel spending in retirement?” They also wonder if their portfolio is properly invested.

We asked Matthew Sears, a financial planner at T.E. Wealth in Toronto, to look at Sam and Serena’s situation. Mr. Sears also holds the chartered financial analyst (CFA) designation.

What the expert says

Mr. Sears explored a number of alternatives that have some basic assumptions in common. Serena retires this spring and they budget spending at $120,000 a year.

The forecast extends to Serena’s life expectancy of 95, and assumes an investment return of 4 per cent after fees and an inflation rate of 2 per cent. Serena gets 64 per cent of maximum CPP benefits, which she begins drawing at age 60. If Sam dies before Serena, her living expenses are reduced by 25 per cent. She is entitled to two-thirds of his work pension.

“In this first scenario, Serena will run out of investment assets at age 85,” Mr. Sears says. She could tap the equity in her home to fund her lifestyle thereafter.

If, in contrast, they could earn a rate of return of 5 per cent on their portfolio, the investment assets would last until she is 91.

“Once investment assets run out, pension income and government benefits would fund about $54,000 a year in lifestyle expenses in 2019 dollars,” Mr. Sears says. This would fall short of their target, but she could draw on the equity in their home if necessary.

“In order for Serena not to have to tap into the equity of the house at age 85, they would need to lower their spending target by $10,500 a year (to $109,500) when Serena retires this spring, or earn a rate of return on their investments of 5.5 per cent after fees rather than 4 per cent,” the planner says.

Suppose she works longer. If Serena worked another five years, to age 60, their savings would last to her age 95, assuming a 4-per-cent rate of return.

Mr. Sears also looks at how the plan might change if Sam lives to age 85 or 95, using the same assumptions. Serena would still run out of investment assets before she reached 95, he says. Even in the most optimistic scenario, in which Sam lives to age 95 and they earn a rate of return of 5 per cent, she is only better off by one year, running out of savings at age 92 rather than 91.

Next, Mr. Sears looks at the couple’s investments. They are heavily weighted in stocks, mainly Canadian. A balanced portfolio of 40-per-cent fixed income and 60-per-cent stocks would be more suitable, he says. The stock portion should be divided equally among Canadian, U.S. and international equities.

Sam and Serena have a number of different investment accounts, he notes. “They should sit down annually with their accountant and/or investment adviser to review where their cash flow will be coming from to meet their spending needs,” Mr. Sears says. They should also set out a plan to rebalance their holdings to keep their asset mix on target.

Client situation

The people: Sam, 63, and Serena, 54

The problem: Can Serena retire this spring?

The plan: The simplest thing would be to lower their retirement spending target. Alternatively, Serena could work longer, or they could try to earn a higher rate of return on their investments.

The payoff: A clear understanding of the choices before them.

Monthly net income (2018): $11,895

Assets: His TFSA $76,200; her TFSA $45,700; his RRSP $96,000; her RRSP $303,800; her locked-in retirement account $175,800; her corporate investments $414,200; joint investments $185,300; robo investments $20,800; cash, savings and chequing $75,600; estimated present value of his DB pension $511,842; house $700,000. Total: $2.6-million

Monthly outlays: Property tax $365; home insurance $80; utilities $270; maintenance $380; garden $125; car lease $500; insurance $155; fuel $260; maintenance, parking $110; groceries $690; clothing $250; car loan $1,035; gifts $175; charity $160; vacation, travel $2,350; other discretionary $400; dining, drinks, entertainment $1,335; personal care $265; club membership $20; sports, hobbies $320; subscriptions $20; other personal $275; dentists $25; disability insurance $90; phones, TV, internet $360; RESP (for grandson) $200; TFSAs $915; addition to investments $400. Total: $11,530

Liabilities: Car loan and car lease $75,000

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