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At the rate they are going, Keith and Karen will have about $2.2-million in savings and investments by the time he retires in 2025.

Glenn Lowson/Globe and Mail

At the age of 58, Keith is preparing for the day when he will retire from his $140,000-a-year job as a health-care professional a few years hence. His wife, Karen, also 58, is unemployed and has no plans to return to work. They have no children.

Their circumstances are unusual in that they have substantial assets but no house.

“We have been renters for all of our lives,” Keith writes in an e-mail. “This proves that people do not need to own a home in order to succeed financially.” He estimates their net worth at $1.6-million, with about 40 per cent in stocks and 60 per cent in fixed income.

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Their main question is what is the most tax-efficient strategy for drawing down their savings once Keith is no longer working. They wonder, too, whether they should buy an annuity or two at some point to guard against outliving their savings. If so, what would be the best time to do so?

Their retirement spending goal is $72,000 a year after tax.

We asked Ian Calvert, a portfolio manager at Highview Financial Group in Toronto, to look at Keith and Karen’s situation.

What the expert says

At the rate they are going, Keith and Karen will have about $2.2-million in savings and investments by the time he retires in 2025, Mr. Calvert says.

This is assuming they both continue to make their maximum tax-free savings account contributions and Keith continues to contribute to his pension, which is matched by his employer, the planner says. While they have done a “great job of saving their surplus income, proving that financial success can be achieved without owning real estate,” not having a diversified balance sheet – a house to fall back on – “does present a concentrated set of retirement challenges and risks,” Mr. Calvert says.

“Without the prospect of downsizing, which typically results in an injection of capital to the family, the management of their investment portfolio should be done with extreme care,” he says. “Managing their market risk should be a top priority.”

By the time Keith retires, their $72,000 a year spending goal will have risen with inflation to about $84,000. If they can earn an average annualized rate of return after fees on their portfolio of 3.5 per cent, “they will be terrific shape and should have no concern of outliving their money,” Mr. Calvert says. They have no need to reach for additional risk, he adds.

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While their asset mix is appropriate, it’s important that they keep an eye on it, rebalancing when warranted, the planner says. “If left unwatched, their retirement portfolio could drift away from the target asset mix of 40 per cent equities, leaving them with more risk than they desire or are aware of.”

They should ensure, too, that they have a strong yield or cash flow from the portfolio in the form of dividends and interest, Mr. Calvert says. “For instance, if they could construct portfolio to have a 2.5-per-cent to 3.5-per-cent return through interest and dividend income alone, there would be less dependence on market growth and a higher level of certainty to their financial plan.”

When Keith retires, they should give careful consideration to how they withdraw from the portfolio and build a tax-efficient income plan. Their pillars of income will consist of government benefits (Canadian Pension Plan and Old Age Security), retirement savings (registered retirement savings plans and defined contribution pension) and their joint taxable portfolio.

Because neither of them has a defined benefit pension, it makes sense for them to draw from their RRSPs and locked-in retirement account (from the DC pension) early in retirement because they will both be in a very low marginal tax bracket, Mr. Calvert says. If they converted their RRSP to a registered retirement income fund (RRIF) and their LIRA to a life income fund (LIF), their combined minimum withdrawal would be about $41,000 a year, which could be split for tax purposes.

This income, combined with their government benefits, would leave a shortfall of about $17,500 a year to be taken from the non-registered portfolio. Even with no further contributions to their non-registered portfolio, this would be a very healthy withdrawal rate, Mr. Calvert says. They could maintain their capital and still have a healthy amount of investable assets at the age of 90.

This assumes no change to their spending other than inflation. If one or both had to move to a long-term care home, this could be quite expensive, the planner notes. They have no real estate to sell to help fund the cost. “Not overspending in the early years so they have enough capital to fund this potential transition should not be overlooked.”

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As for annuities, they could be a valuable component of their retirement plan (using a portion but not all of their investable assets), Mr. Calvert says. Annuities, sold by life insurance companies, pay a guaranteed regular income for life.

The optimal age to start an annuity is influenced by a number of factors, but mainly by a person’s longevity and income requirements. If Keith and Karen have a family history of longevity and a healthy lifestyle, they could use a portion of their capital to buy an annuity at age 70 or so. A good starting point would be to consider what their fixed expenses are. Then, consider an annuity payment that, when combined with CPP and OAS, covers all or most of their fixed expenses, the planner says.

Client situation

The people: Keith and Karen, both 58

The problem: How to draw down their savings in retirement in a tax-efficient way.

The plan: Draw on registered savings first to take advantage of low tax bracket before mandatory minimum withdrawals kick in at age 72.

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The payoff: The likelihood of having all the savings they’ll need to last a lifetime.

Monthly net income: $8,365

Assets: Bank accounts $50,000; joint investment portfolio $713,620; her portfolio $64,790; his TFSA $63,000; her TFSA $63,000; his RRSP $139,300; her RRSP $207,400; his DC pension plan $382,760. Total: $1.68-million.

Monthly outlays: Rent $1,475; transportation $490; groceries $500; clothing $100; gifts $50; vacation, travel $500; dining, drinks, entertainment $60; personal care $75; club memberships $200; subscriptions $30; doctors, dentists $300; prescriptions $25; phones, TV, internet $205; RRSPs $1,000; TFSAs $915; pension plan contributions $600. Total: $6,525. Surplus of $1,840 goes to savings and investments.

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

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

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