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Randy.

Christopher Katsarov/The Globe and Mail

Randy was doing everything right financially – saving, spending less than he earned, avoiding consumer debt. By the time he was 53, his house was paid off, he was earning six figures plus and had more than $1-million in savings. He was cruising to a comfortable retirement.

“I was even going to splurge and buy myself a new used car,” Randy writes in an e-mail. “Then I was diagnosed with Parkinson’s disease.”

With this new reality, “how much do I need to save given the strong possibility I may need a personal support worker or go on disability?” he asks.

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He also wonders whether he should sell his house, which he has been renting out profitably since he moved in with his common-law partner a few years ago. (Randy and his partner keep their finances separate and have a co-habitation agreement that stipulates no financial support in the event either becomes disabled.)

Now 56, Randy is earning more than $250,000 a year, including bonus, in financial services. He gets another $32,100 in rental income and $27,000 in dividend income from his non-registered investment portfolio. He also has substantial registered savings.

The RRSP deadline is March 2: What you need to know about saving for retirement – and building a financially secure future

He wants to know if he can afford to retire at year-end – to enjoy life while he is still able – with a budget of $70,000 a year after tax, indexed to inflation.

We asked Robyn Thompson, president and certified financial planner at Castlemark Wealth Management in Toronto, to look at Randy’s situation.

What the expert says

“Randy expects that he will have a good quality of life for some time, but unfortunately one cannot predict how long this will be,” Ms. Thompson says. This makes planning a challenge.

Once Randy quits working at year-end, his investment property will provide an important source of income, Ms. Thompson says. She recommends Randy hold it until he is 64 “so he doesn’t rely solely on income from the investment portfolio.” This will allow him to draw less than he otherwise would from his investments in his early retirement years, guarding against “sequence-of-return risk,” the planner says. This is the risk that the wrong timing of withdrawals from retirement accounts will depress the overall rate of return of the portfolio. For example, if the portfolio is largely in stocks and Randy begins withdrawals during a bear market, his remaining capital will not be replenished either by new deposits or by bull-market driven growth, reducing his return.

“At age 64, before he starts to take CPP [Canada Pension Plan benefits], I recommend he sell the property,” Ms. Thompson says. By then, with inflation, it is estimated to be worth about $1.2-million. He will have a capital gain of about $640,000, of which $320,000 will be taxed at his marginal tax rate. Randy will use the sale proceeds to pay off the line of credit and to help cover lifestyle expenses for the 2028 year, adding the balance to his non-registered portfolio. Randy should seek the advice of an accountant to understand the tax implications prior to the sale.

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Next, she looks at cash flow. “Layering income to ensure Randy stays in a consistent tax bracket without eroding his wealth is complicated, and care will need to be taken with drawing down his assets to reduce tax,” Ms. Thompson says. “Randy should meet with an accountant and put a tax plan in place to forecast capital gains on the rental property, harvest tax losses and time the receipt of income from investment and retirement accounts.”

From the time Randy retires to the end of 2027, he will need $89,100 in pretax income (indexed) to meet his spending goal. He should convert a portion of his RRSP to a registered retirement income fund (RRIF) and draw down $27,000 a year, she says. He will have $32,100 in rental income and $30,000 in eligible dividends or capital gains from his non-registered portfolio. With an average tax rate of about 20 per cent, he should meet his target.

At the age of 65, Randy will start collecting CPP benefits (estimated at 60 per cent of the maximum) of $10,240 a year. RRIF withdrawals will add another $30,000 a year. He will convert his locked-in retirement accounts (from a previous employer) into a life income fund and withdraw $19,000 a year. The balance of $43,000 will come from dividends and capital gains from the non-registered portfolio, for total after-tax income of $84,000.

At the age of 70, Randy’s lifestyle expenses are forecast to rise by $100,000 a year, indexed for inflation at 2 per cent a year, to cover health-care costs to the age of 80, at which point he will still have a projected net worth of about $2.4-million, including his share in the house he owns with his partner. The forecast assumes a target “real” rate of return of 3.5 per cent after inflation.

Finally, the planner looks at Randy’s investments. Given that he plans to retire soon, Randy is taking on unnecessary risk, Ms. Thompson says. Seventy-four per cent of his non-registered holdings are in stocks and stock funds. She recommends he reduce his equity allocation to 60 per cent, spread out among blue-chip, dividend-paying stocks, preferred shares and exchange-traded funds. He should allocate 40 per cent to fixed-income investments, spread among corporate and government bond ETFs and other fixed-income ETFs.

In his registered accounts, Randy has substantial cash. He should rebalance these portfolios to hold more fixed-income securities instead. After he has retired, Randy might want to hire a discretionary portfolio manager to look after his investment assets, the planner says. Fees are typically about 1 per cent a year.

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While Randy is in a position to retire now, “he will need to take care not to jeopardize his nest egg by being too aggressive in the markets or drawing money down in bad years, which would lead to the steady erosion of his wealth.”

Client situation

The person: Randy, age 56

The problem: Can he afford to retire soon and still be able to afford the health care he expects to need in future? Should he sell his rental property?

The plan: Sit down with an accountant to draw up a plan to keep taxes consistent throughout his retirement years. Retire as planned. Sell the rental at age 64. Rejig investments to lower risk.

The payoff: Financial independence.

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Monthly net income: $15,150

Assets: Non-registered $1,050,615; RRSPs $345,275; LIRAs $62,915; TFSA $122,920; group RRSP $76,825; DC pension plan $174,980; his share of residence $850,000; rental property $950,000. Total: $3.63-million

Monthly outlays: Property tax $250; home insurance $60; utilities $125; maintenance $500; transportation $565; vehicle maintenance $300; grocery store $600; clothing $185; line of credit $540; gifts $100; charity $500; vacation, travel $450; dining, drinks, entertainment $750; personal care $95; club membership $50; subscriptions $50; vitamins, supplements $100; disability and critical illness insurance $115; phone, TV, internet $200; RRSP $665; TFSA $500; pension plan contribution $435. Total: $7,135. Surplus cash flow of $8,015 goes to discretionary spending with balance to non-registered.

Liabilities: Home equity line of credit on rental $319,000

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

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

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