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What’s the best way for Eileen to give some money to her children? How should she invest for retirement?Tijana Martin/The Globe and Mail

At age 57 and on her own again, Eileen is looking to a future quite different from what she might have imagined. She’s still living in the family home in a pricey Toronto bedroom community, but now it’s mortgaged to roughly half of its value. She also retained ownership of the family cottage.

Eileen would like to retire from her high-paying executive job at age 65. She’s bringing in anywhere from $350,000 to $400,000 a year in salary, bonus and company stock. She also has substantial savings and investments.

“Should I be selling my house so that I can pay off the mortgage before I retire?” Eileen asks in an e-mail. “Or am I better off to stay where I am?” She figures she would not be able to afford anything in her existing neighbourhood without taking on another big mortgage.

Two of her four young adult children are still living at home, but one will be off to university soon and the other is thinking of moving out in a year or two. The children range in age from 18 to 28.

Eileen also asks about the best way to set things up if she wants to give each of her children $40,000.

Her retirement spending goal is $70,000 a year after tax.

We asked Amit Goel, a portfolio manager and partner at Hillsdale Investment Management Inc. of Toronto, to look at Eileen’s situation. Mr. Goel holds both the certified financial planner and chartered financial analyst designations.

What the expert says

With a modest lifestyle and a substantial investment portfolio, Eileen can easily achieve her goals, Mr. Goel says. She can retire two years earlier at age 63, spend 10 per cent more postretirement and give twice as much money – $80,000 rather than $40,000 – to each of her four children. His forecast assumes an annual postretirement growth rate in her portfolio of 5.5 per cent a year net of fees and expenses.

Eileen’s house will be too big once the children have all moved out, Mr. Goel says. He suggests she sell it in 2023 for an estimated $2.7-million, buy a smaller place for $1.5-million and pay off her existing mortgage. “The smaller residence plus the cottage will still represent more than 50 per cent of her net worth and continue to provide exposure to growth in real estate,” the planner says.

Becoming debt-free will reduce Eileen’s anxiety level and help her focus on other financial matters. With the mortgage paid off, Eileen will save about $60,000 a year, he notes. The additional savings “will help build her retirement portfolio and provide liquidity for gifting money to her children.”

Eileen asks about a tax-efficient way to gift $40,000 each to her four children spread over the next few years. She can contribute to their tax-free savings accounts and the recently announced tax-free first home savings accounts, or FHSAs. The children could claim tax benefits on the FHSA, which is set to launch in 2023, and invest the funds “early and aggressively.” When they decide to buy their first home, the potential investment gains and withdrawals will be tax-free, the planner says.

For the TFSA, Eileen can fill up the $6,000 contribution room for each child from 2023 to 2027, for a total of $30,000 each over five years. “This also ties in well with her earning years.”

For the FHSA, she can gift a maximum of $8,000 a year for five years, or $40,000, to each of her children when they start earning. The children will get a tax refund for these contributions. Assuming a 25-per-cent tax refund, or $10,000, the gift will be worth $50,000 to each child. “Effectively, each of her children will receive $80,000 versus the originally planned $40,000.”

Alternatively, Eileen could structure the gifts as loans, Mr. Goel says. The children would have to pay Eileen a minimum interest rate, currently about 1 per cent but likely rising to 2 per cent soon, the planner says. The interest would be taxable in Eileen’s hands. Once the children reach their higher-earning years, they could pay back the loans, “which would help strengthen Eileen’s retirement plan further,” the planner says.

When Eileen retires from work, her investment portfolio is expected to be between $2-million and $2.5-million. To ensure an optimal risk-return allocation, Eileen could split her investment portfolio into three distinct buckets with different goals. For safety and emergency funds, Eileen should keep three to five years of cash flow needs ($300,000 or 15 to 20 per cent of her portfolio) in cash, guaranteed investment certificates and other cash equivalents.

To beat inflation, she could create a second bucket of stable growth securities. This can be a mix of low-volatility, dividend-generating, tax-efficient investments with the potential to grow or beat inflation over the long term. These securities could comprise 40 to 60 per cent of Eileen’s portfolio, he says. “This could include some tactical inflation-hedge exposure to energy, commodities, and industrial sectors.”

For her legacy or long-term holdings – the portfolio Eileen may never need or spend – she should invest more aggressively. This will help her outpace inflation and have enough to pay for emergency medical costs in her old age if the need arises, Mr. Goel says. This could be 20 to 30 per cent of the portfolio.

Her investment strategy could be as follows: When markets are way up, sell more and fill up her cash reserves. When markets are moderate, take out one year of cash flow needs. When markets are down, do not sell anything. Take out funds from the cash reserves. Finally, when markets are way down, “be brave and smart and buy more!” the planner says.

To smooth out her taxes and reduce the amount of income she will have to draw when she converts her registered retirement savings plan to a registered retirement income fund, Eileen could withdraw from her RRSP portfolio between age 63 and when she converts it to a RRIF at age 71. “We have assumed an annual $100,000 RRSP withdrawal from age 63 to 70,” Mr. Goel says. This strategy will bring down her total taxable income at age 71 to $125,000 a year. He suggests Eileen claims Old Age Security benefits at age 65, when her taxable income may be closer to the lower income threshold for the OAS clawback. Depending on her income, she may be able to qualify for 20 per cent to 40 per cent of the full OAS benefit, he says. He suggests Eileen defer Canada Pension Plan benefits to age 70.

Client situation

The people: Eileen, age 57, and her four children

The problem: Should she sell her house and buy a smaller one? What’s the best way to give some money to her children? How should she invest for retirement?

The plan: Sell the house and become free of debt. Consider contributing to tax-sheltered plans for her children. Invest in a balanced portfolio and draw down RRSP holdings as soon as she retires from work.

The payoff: A clear path through the transition years from a high-powered career to a comfortable retirement.

Monthly net income: $17,835

Assets: Stocks $286,000; TFSA $72,000; RRSP $1,005,000; registered education savings plan $73,000; residence $2.2-million; cottage $600,000. Total: $4.2-million

Monthly outlays: Mortgage $4,790; property tax, house and cottage $795; property insurance $355; cottage hydro $150; home hydro $250; heating $100; maintenance $100; water heater $35; garden $100; vehicle insurance $260; other transportation $380; groceries $800; clothing $200; gifts, charity $220; vacation, travel $200; cottage maintenance $100; dining, drinks, entertainment $130; club membership $70; online subscriptions $70; pets $20; lessons $135; health care, insurance $725; internet, cellphones $345; RRSP $790; RESP $435; TFSA $865; stock purchase $1,915. Total: $14,335.

Liabilities: Residence mortgage $1,173,000 at 1.5 per cent

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

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