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Chris Donovan/Globe and Mail

After long and successful sales careers, Mark and Marlene decided in 2017 to retire from the working world early. He is 56, she is 58.

Now Mark wonders whether he will have to go back to work to support their goals, which include “significant travel” and leaving an inheritance for their two children, who are in their 20s.

Marlene and Mark have amassed substantial assets thanks to hard work, “being conscientious savers” and some successful real estate transactions. Neither has a work pension. Mark is a “do-it-yourself” investor who is beginning to worry a bit about the responsibility.

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“My performance has been mixed at best,” he writes in an e-mail. “I get lured into buying high-flying growth stocks or [exchange-traded funds] without a proper plan of allocation and diversification.” With low interest rates and “the markets seemingly near the end of a bull run, I have become uncomfortable that we may not have enough saved to stay retired,” Mark adds. He’s thinking about hiring a discretionary investment firm “so I can reduce the amount of time I spend in front of the TV watching BNN [Bloomberg] and CNBC, like I have been lately.”

Mark is becoming keenly aware that he will have to draw up a comprehensive financial plan to determine if they have enough money, whether it is invested properly and how to draw on it in the most tax-efficient way. Their spending goal is $85,000 a year after tax.

We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Mark and Marlene’s situation. Mr. MacKenzie’s most recent book is The Philanthropic Family: 5 Keys to Maximizing Your Family’s Happiness and Leaving a Lasting Legacy.

What the expert says

Mark and Marlene have to plan for a long retirement, Mr. MacKenzie notes. They would like to leave $500,000 (with today’s purchasing power) to each of their two children.

Mr. MacKenzie prepared his forecast based on the principles of essential, rather than surplus, capital explored in his new book. The capital required to achieve the stated goals, including the inheritance, is considered essential capital. Looked at this way, Mark and Marlene have nothing to worry about.

"They have a $1-million surplus that can be used to spend more, give to the children sooner rather than later, invest more aggressively or support their favourite charity.”

The forecast shows that with an average real or inflation-adjusted rate of return of 3 per cent (a 5-per-cent return with inflation of 2 per cent), they should be able to maintain their lifestyle and their current net worth of more than $3-million, Mr. MacKenzie says.

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Given their long time horizon, in order to have some inflation protection, a significant portion of their portfolio should be in investments that have the potential for capital gains, Mr. MacKenzie says. Dividends and capital gains are also tax efficient.

As it is, they have about 45 per cent of their portfolio in equities, 20 per cent in fixed income and 35 per cent in cash. “This high allocation to cash suggests that they are not following a disciplined investment process. They should consider using some of the cash to increase their allocation to equities.”

By drawing up an investment policy statement and following a disciplined investment process, Mark will likely earn a better long-term rate of return “while spending less time watching and trying to time the market,” the planner says. The investment policy statement will help him rebalance the portfolio when necessary “in a non-emotional way.”

Next, Mr. MacKenzie looks at the couple’s retirement cash flow. They plan to start taking Canada Pension Plan benefits at the age of 65. But since they don’t need the money, “if they are in good health and expect to live well into their 80s, they should consider delaying the start of CPP until age 70,” the planner says. This would increase their monthly benefits by 42 per cent.

Between now and the time they begin drawing government benefits, they should each make annual withdrawals from their registered retirement savings plans sufficient to bring their taxable income up to about $42,000 each a year, Mr. MacKenzie says. This will allow them to take advantage of their comparatively low current income-tax rates so they’ll end up paying less income tax in the long run. They may also avoid the clawback of their Old Age Security, which begins at an income of about $76,000 a year.

Finally, “if they want to simplify their life, make a guaranteed return, be tax efficient and also guarantee that their children receive a $500,000 inheritance each, they should look into tax-exempt whole life insurance,” Mr. MacKenzie says. In one respect, an investment in tax-exempt insurance is similar to an investment in their tax-free savings accounts (TFSAs) in that it would allow them to move a portion of their invested capital out of a taxable account and into an insurance policy where it could accumulate tax-free. The key features of this type of insurance is that there is no stock market risk and no income tax on the growth in value of the policy. The eventual death benefit is received on a tax-free basis by the beneficiaries, in this case the two children.

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Client situation

The people: Mark, 56; Marlene, 58; and their two children, 23 and 25

The problem: Figuring out whether they’re well-set financially to achieve their goals.

The plan: Sit down with an investment counsellor and draw up an investment policy statement to keep themselves on track and make rebalancing easier.

The payoff: No more fretting in front of the TV set watching the business news.

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Monthly net income: No income, cash flow drawn from savings and investments as needed.

Assets: Cash and short-term investments $255,000; GICs $100,000; stocks $375,000; mutual funds $25,000; real estate investment trusts $376,000; his TFSA $60,000; her TFSA $65,000; his RRSP $685,000; her RRSP $450,000; locked-in retirement accounts $92,000; residence $1-million; cottage $350,000. Total: $3.8-million

Monthly outlays: Property tax $540; home insurance $70; utilities $265; maintenance, garden $125; car insurance $185; fuel $335; oil, maintenance, parking $255; grocery store $750; clothing $110; gifts $180; charity $170; vacation, travel $750; other discretionary $500; dining, drinks, entertainment $465; personal care $135; club membership $15; pets $200; subscriptions $50; cottage, boat expenses $400; health care $90; life insurance $200; phones, TV, internet $210; TFSAs $915. Total: $6,915

Liabilities: None

Want a free financial facelift? E-mail

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

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