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Donald and Dora want to figure out whether they have enough money to live comfortably for the rest of their lives without lowering their living standard.JOHNNY C.Y. LAM/The Globe and Mail

Dora and Donald have entered a new phase of their financial lives and are feeling their way around, uncertain.

“We are newly retired and need a level of comfort that our investments, RRSPs and defined-benefit pension plans will provide an adequate income flow without burning through our capital for 30 years,” Dora writes in an e-mail. She is 63; her husband, Donald, is 62.

They have no debt and their Eastern Ontario house is fully paid for. Ideally, they’d like to spend some time in a warmer climate each winter, buy a new boat and play golf. They have substantial savings and investments they are drawing on, as well as collecting Canada Pension Plan benefits.

Don is drawing from one of his pensions, which pays $9,660 a year. He has a second pension that will pay $22,320 a year when he is at the age of 65. Dora has a pension of $9,144 a year starting at age 65. But they worry their assets may not be allocated in the best way.

“Our portfolio is weighted at 65-per-cent-plus in stocks and mutual funds,” Dora writes. “As our retirement income backbone, can we rebalance our investments to a safer, more conservative portfolio without hindering our growth target of 4 per cent?” she asks. They wonder, too, how to “minimize” income tax.

Their spending goal is $93,000 a year after tax.

We asked Jason Pereira, a financial planner at Woodgate & IPC Securities Corp. of Toronto, to look at Dora and Don’s situation.

What the expert says

Donald and Dora look to be well fixed, with after-tax cash flow of $114,510 a year, Mr. Pereira’s calculations show.

The estimated cash flow for the current year comes from Don’s pension ($9,660), their CPP benefits ($16,664), withdrawals from their life income funds (from previous employers) of $2,195 and withdrawals from their registered retirement savings plans/registered retirement income funds of $57,400 for the current year. The balance of $43,425 will come from their non-registered portfolio. Their tax bill will come to about $14,830.

The amount they draw from their savings will fall when Don begins collecting his second pension and they both begin getting Old Age Security benefits.

This provides enough money to cover their living expenses of about $93,000 and still contribute the maximum to their tax-free savings accounts each year as well as add to their savings via Dora’s non-registered investments.

But their investments need work, Mr. Pereira says. “Their stock holdings are way too concentrated, with only a few stocks and [equity and balanced] mutual funds,” the planner says. As well, they have too much money (more than a third) in guaranteed investment certificates – “guaranteed to lose money or break even [after inflation] in a taxable account.”

As an example, a GIC paying 3 per cent would leave an investor with about 2 per cent after tax, assuming a 30-per-cent marginal tax rate. “If inflation is 2 per cent, there is no growth.”

Instead, Mr. Pereira recommends corporate-class mutual funds for the couple’s taxable investment portfolio. As an emergency fund, he suggests they put $45,000 in a non-registered corporate class short-term bond fund. The advantages of corporate-class mutual funds are twofold: The first is potentially lower taxable distributions, resulting in a tax deferral. The second is they can convert all forms of income into capital gains, lowering their tax bill. This can be important for retirees trying to avoid clawbacks of Old Age Security benefits.

Shifting their taxable investments to corporate-class funds would result in their leaving an estate $300,000 larger than it otherwise would be, the planner says. The plan assumes they live to age 95.

He recommends they work with a financial planner to shift the asset allocation of their portfolio so that they hold 60 per cent bonds and 40 per cent stocks. To make it easier to stick to their allocation, they should look to consolidate their holdings.

Mr. Pereira suggests Dora and Donald “max out” their TFSA contributions every year and direct any other savings to a non-registered account for Dora.

The planner suggested they begin withdrawing money from their RRSPs/RRIFs this year rather than waiting to make mandatory withdrawals at age 72. (If they have not already done so, taxpayers must convert their RRSPs to RRIFs by age 71. They must begin making mandatory minimum withdrawals – whether they need the money or not – in the year they turn 72.)

He recommends they base the withdrawals on the age of the younger spouse so the amount will be lower. “Withdrawing funds from the RRSP/RRIF before age 72 spreads out the taxable income and takes advantage of lower-income years,” he says.

The minimum rate of return required under Mr. Pereira’s plan is 1.75 per cent (before tax and inflation, but after fees), far lower than Dora and Donald’s target of 4 per cent, so there is no need to have a big chunk of their portfolio in stocks, the planner says. They have plenty of room to live the life they want without compromising their financial well-being.

Client situation

The people: Dora, 63, and Don, 62

The problem: Figuring out whether they have enough money to live comfortably for the rest of their lives without lowering their living standard.

The plan: Revisit their investments to gain broader diversification, better balance and less risk. Continue contributing to TFSAs.

The payoff: Peace of mind

Monthly net income (2018): $9,542

Assets: House $750,000; cash $10,000; emergency fund $45,000; her taxable account $548,000; her RRSPs $350,000; her TFSA $55,820; his RRSP $317,000; his LIF $44,000; his TFSA $67,500; estimated present value of his pension plans $360,000; estimated present value of her pension plan $150,000. Total: $2.7-million

Monthly outlays: Property tax $535; home insurance $110; utilities $385; security $45; maintenance $455; car lease $555; other auto $525; groceries $750; clothing $100; gifts, charity $900; vacation, travel $1,000; dining, drinks, entertainment $1,050; personal care $100; golf $100; sports, hobbies $200; pets $50; dentists, drugstore $55; health insurance $290; life insurance $85; phones, TV, internet $230; TFSAs $915. Total: $8,435

Liabilities: None

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

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