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Elliott and Eva's biggest fear is that the stock market will fall soon after Elliott quits working.Justin Tang/The Globe and Mail

As a partner in a large and successful firm, Elliott has earned good money throughout his working life. Now he’s preparing to leave his career behind and retire next fall. His wife, Eva, is no longer working.

Elliott is 59, Eva, 55. They have two grown children.

Their biggest fear, Elliott writes in an e-mail, is that the stock market will fall soon after Elliott quits working “and we run out of money.” Neither has a company pension plan although they do have substantial savings and investments.

Elliott wonders whether they should buy an annuity for downside protection from a market drop, or whether bonds will do the trick. “What should our asset mix in our portfolios be?” he asks. “We have been moving into bonds but are not sure how much we should have.”

They’d like to leave their cottage to their children and pay any estate tax that would be due on it. Their annual spending goal is $120,000 after tax.

We asked Ian Calvert, a financial planner and portfolio manager at HighView Financial Group in Toronto, to look at Elliott and Eva’s situation.

What the expert says

Because neither Elliott nor Eva has a defined benefit pension, they will have to prudently manage their personal assets and spending throughout their retirement years, Mr. Calvert says. Fortunately, they have substantial investments to draw on, spread across a variety of accounts: registered retirement savings plans, joint non-registered investment accounts, tax-free savings accounts and two holding companies. This will give them “tremendous flexibility” when it comes to withdrawing funds in a tax-efficient way, the planner says.

First, Mr. Calvert looks at their RRSPs, the foundation of their retirement income. They have a combined total of $1.56-million in RRSP accounts.

“If both Elliott and Eva convert their RRSPs to RRIFs (registered retirement income funds), the combined minimum withdrawal (based on their own ages) in 2021 will be about $55,000 ($35,000 for Elliott and $20,000 for Eva),” he says. To take advantage of her low marginal tax rate, Eva should consider taking more than her minimum because her total income will still be quite low.

If they each withdrew $35,000 from their RRIFs, that plus the investment income from their non-registered portfolio would give them taxable income of about $50,000 each, the planner says. “That’s until they both begin taking Canada Pension Plan and Old Age Security benefits at age 65,” he adds. “The years between the start of retirement and age 65 will be their lowest-income years, so they should take advantage of the low marginal tax rate.”

To fund taxes and lifestyle needs of $120,000, Elliott and Eva would need to draw about $65,000 from their other savings, Mr. Calvert says. “This would reduce their capital, but only in the short term.” When their government benefits start, the amount they would have to withdraw would be cut in half.

To fund this rate of withdrawal, they will have to generate a 4- to 5-per-cent annualized rate of return. To achieve that, they will need some stocks and equity funds in their portfolio to generate growth and dividends, “but not at the allocation they have today” – about 75 per cent. “They should shift to holding more investment grade bonds as they progress throughout retirement,” the planner says. Moving toward a more balanced portfolio with 50- to 60-per-cent equities will provide a less volatile ride for their retirement savings. They don’t need to reach for the additional risk.

Elliott and Eva also have done a good job of diversifying their portfolio internationally, Mr. Calvert says. “What they are missing right now is downside protection as they are heavily exposed to equities.”

If markets suffer a “significant pullback” during their first five years of retirement, when their portfolio withdrawals are the highest, it would take a long time to recover “trough to peak,” the planner notes. “If this event did take place, it would be important not to do any emotional rebalancing – selling – when equities are low.”

Buying an annuity could add some certainty and predictability to their retirement income plan, but “I wouldn’t suggest putting too much capital into an annuity right now” because interest rates are so low, he says. “One option to manage this risk is to buy several annuities over a number of years and possibly benefit if interest rates rise.”

Finally, the cottage. If it rose in value by 2 per cent a year, there would be a total capital gain of $426,000, of which half would be taxable, Mr. Calvert says. “If their goal is not have the capital gains tax reduce the size of their estate, they could consider covering the (future) tax with an insurance policy.”

Client situation

The people: Elliott, 59, Eva, 55, and their two adult children.

The problem: How to plan financially for their postwork future and reduce the market risk in their portfolios.

The plan: When Elliott retires from work, withdraw funds in the most tax-efficient way. Move gradually from a heavy stock weighting in their portfolios to bonds. If it makes them feel more comfortable, consider buying some annuities spread over a number of years for downside protection.

The payoff: Peace of mind.

Monthly net income: $12,800

Assets: Stock portfolio $780,245; investments in holding companies $281,115; his TFSA $75,675; her TFSA $75,790; his RRSP $965,285; her RRSP $593,515; residence $550,000; cottage lot $350,000. Total: $3.67-million

Monthly outlays: Property tax $625; home insurance $275; utilities $340; maintenance $350; vehicle insurance $220; fuel $500; maintenance $375; grocery store $1,200; clothing $250; car loan $1,500; charity $750; vacation, travel $1,500; dining, drinks, entertainment $1,475; club memberships $100; subscriptions $100; drugstore $75; health, dental insurance $500; life insurance $550; phones, internet, TV $375; TFSAs $1,000. Total: $12,060

Liabilities: Home equity line of credit $100,000

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

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