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financial facelift

Avery is 62, Ellen 60. He has a work contract with his employer that will end in October.

“We have three children in their mid-30s and two grandchildren,” Avery writes in an e-mail. They like to help them out when they can.

They own their house outright and have substantial savings. With no pension plans, they are concerned about preserving and protecting their capital. They want to maintain their current lifestyle and vacation once a year.

“Can I comfortably retire in the fall of this year and draw our required monthly net income of $8,200?” Avery asks. Ellen has already retired. “How long will our savings last before we run out of money?”

They also wonder when they should begin drawing Canada Pension Plan benefits and how to keep income taxes to a minimum.

We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Avery and Ellen’s situation.

What the expert says

Avery and Ellen have worked hard, saved their money, and amassed a net worth of $2.2-million, Mr. MacKenzie says. “They wonder if they can maintain their lifestyle if they live into their 90s.”

They needn’t worry. The financial plan prepared by Mr. MacKenzie, using an average rate of return on investments of 5 per cent, shows that by the age of 90, their net worth (in dollars with the same purchasing power as today) will be slightly higher than it is today, Mr. MacKenzie says.

One of their longer-term goals is to protect their capital, he notes. Yet, nearly 90 per cent of their investment portfolio is in stocks and stock funds. “Given that they can easily achieve their goals with a real return of 3 per cent (average return of 5 per cent less inflation of 2 per cent), they are taking unnecessary risk by having such a large proportion of their portfolio in equity investments,” the planner says.

In the market crash of 2008, Avery and Ellen were both working and were relatively unfazed by the drop, he says. “In the next market setback, if their portfolio was to drop by 40 per cent or so, they would likely find it much more stressful because they would be drawing from their portfolio to maintain their lifestyle,” he says.

“If that happened, they’d regret taking more risk than necessary to achieve their goals.”

By having a lower-risk asset mix and following a disciplined rebalancing process, they could benefit in two ways during the next market crash, Mr. MacKenzie says. "First, their total portfolio would not drop as much in value (if they had some fixed income) and second, they’d have the confidence and 'dry powder’ to buy more stocks when they are relatively cheap.”

They are interested in saving income tax, so there are some things they should consider, the planner says. Each year, they should transfer the maximum amount possible from their joint non-registered investment account to their tax-free savings accounts.

Between the time Avery retires and they reach 65 – during which they will have no other source of income – they should each draw enough from their registered retirement savings plans so that they have $44,000 of taxable income to use up the room in the lowest tax bracket, the planner says. “By doing this they’ll pay tax a bit sooner than necessary, but it will be at a lower tax rate.”

If they are comfortable with their existing debt ($47,000), they should make it tax-deductible, Mr. MacKenzie says. They could sell some securities to pay off their line of credit and then borrow again, using the money to buy different securities. Money borrowed to invest is tax-deductible.

They are worried about running out of money. When they are ready to convert their RRSPs to registered retirement income funds (RRIFs), they might want to consider advanced life deferred annuities, or ALDAs, the planner says. The ALDA was introduced in the recent federal budget to help ensure that the elderly do not outlive their savings. Taxpayers who opt for an ALDA will be able to use some of the money in their RRIF to buy a life annuity on which the annuity payments can be delayed until the age of 85, he says.

(The federal government is amending the rules to permit seniors to buy an ALDA with funds from certain registered plans whose payout can be deferred until the age of 85. Previously, annuities bought with registered funds had to begin paying out after the annuitant turns 71.)

The advantage is that, with a portion of their registered savings transferred to an ALDA, the mandatory minimum RRIF withdrawal will be lower, thereby reducing taxable income in the years before the annuity payments start, Mr. MacKenzie says. As well, the life annuity will provide some additional guaranteed income for their old age.

As to when to begin receiving CPP benefits, a detailed analysis shows that if they both live to the age of 90, there would be a marginal benefit to delaying the start of CPP until the age of 70, he says.

Finally, the couple would like to leave something to their children. “Given that they have surplus funds, they might consider giving their children an advance on their inheritance,” the planner says. This way, “they get to enjoy seeing the good they can do.” They would also save income taxes, probate fees and investment management fees because they would have less money to tax and manage. Most of all, “they’ll be helping their children when help is needed most: while they are still young and getting established."

Client situation

The people: Avery, 62, Ellen, 60, and their children

The problem: Can they maintain their lifestyle and still preserve enough capital to last the rest of their lives plus leave an inheritance for the children?

The plan: Stop taking unnecessary risks with investments. Diversify holdings, explore a new type of life annuity and consider giving the children an advance on their inheritance.

The payoff: Peace of mind and goals fulfilled

Monthly net income: $8,790

Assets: Cash and GICs $67,500; non-registered stock portfolio $583,000; his TFSA $57,000; her TFSA $54,000; his RRSP $582,310; her RRSP $265,000; residence $650,000. Total: $2.26-million

Monthly outlays: Property tax $500; water, sewer, garbage $330; home insurance $100; heat, hydro $460; maintenance, garden $200; vehicle lease $605; other transportation $500; groceries $1,500; clothing $195; line of credit $800; gifts, charity $175; vacation, travel $600; other discretionary $100; dining, drinks, entertainment $1,200; personal care $100; sports, hobbies $250; health care $225; phone, TV, internet $305. Total: $8,145

Liabilities: Line of credit $47,000

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