Before Lyle and Tonia can retire, they have to pay off the $425,000 mortgage on their Alberta house, build up their non-registered savings and pay off their car loan.Ian Martens/The Globe and Mail
Because they have pension plans, Lyle and Tonia are able to hang up their hats earlier than many Canadians and not have to worry about getting by. Lyle is 48, Tonia is 53. They hope to retire in seven years, spending summers in the mountains and winters in a more moderate climate. Lyle would be 55 when they retire and Tonia 60.
Before then, they have to pay off the $425,000 mortgage on their Alberta house, build up their non-registered savings and pay off their car loan. Lyle earns about $102,000 a year and Tonia $110,000. They have no children.
They ask about their investment strategy and how to begin drawing down their savings. “What is the best strategy to decumulate our cash flow?” Lyle asks.
When Lyle and Tonia retire, they plan to sell their house and buy two condos. They wonder how much they can afford to spend on them. Short term, they plan a trip to Europe. Longer term, they will have to replace their two vehicles.
Their retirement spending target is $110,000 a year after tax. Lyle’s pension will pay about $65,000 a year and Tonia’s about $42,000, 60 per cent indexed to inflation.
We asked Nancy Grouni, an advice-only certified financial planner at Objective Financial Partners Inc. of Markham, Ont., to look at Lyle and Tonia’s situation.
What the expert says
Lyle and Tonia wonder how much they can afford to spend if they retire in seven years and whether they can afford to buy two condos, one for the winter months and one for the summer, after they sell the family home, Ms. Grouni says.
If they want to retire in May, 2030, they can afford to spend about $100,000 to $110,000 a year, the planner says. They could buy two condos for about $280,000 each in today’s dollars after they sell their house. This would be about $350,000 each in future dollars in 2030/2031.
Depending on interest rates at the time of mortgage renewal on Jan. 1, 2026, they may wish to use their non-registered assets to pay down their mortgage or a portion thereof, she says. In the meantime, because their mortgage rate is so low – at 1.69 per cent – “I don’t see a compelling case to making additional lump sum payments,” Ms. Grouni says. They can outperform 1.69 per cent without too much effort on their non-registered assets, she says.
Their non-registered assets could be about $50,000 by the time they retire in 2030 after subtracting the planned car purchases and trip to Europe. That’s based on an average rate of return of 4.5 per cent net of fees. In addition, they are projected to have another $375,000 or so in their tax-free savings accounts.
A portion of these assets, plus the estimated net proceeds of their home sale, would be used to fund the condos. By the time they retire in seven years, their house may rise in value to $800,000. That assumes a 3-per-cent annual inflation rate. Once they pay off the mortgage, they’ll be left with about $460,000.
For their non-registered account, they need to think about their time horizon to retirement if they plan to use the money to buy the condos, Ms. Grouni says. Six or so years is not that far away and may not be enough time to fully recover from a potential downturn in the stock market.
Asset mix is a function of a client’s individual risk tolerance, time horizon, liquidity needs and tax planning needs, the planner notes. For now, depending on their risk tolerance, they might consider a balanced asset mix with 40 per cent allocated to guaranteed investment certificates, which are yielding 5.5 per cent, and the balance in equity exchange traded funds (ETFs), divided equally between dividend and growth stocks. “As they approach retirement, within a few years, I would consider moving towards 100 per cent GICs maturing in 2030 when the funds are needed for the condo purchases.” GIC rates range from 5.9 per cent for a one-year GIC to 5.7 per cent for a five-year GIC.
Initially, Lyle and Tonia figured they’d like to spend $500,000 for each of their retirement condos, the planner notes. To do so they would need to save an average of about $55,000 annually to their non-registered account, plus contribute the maximum annually to their TFSAs ($13,000 in 2023). From now to 2030, their lifestyle spending would have to be cut in half, from $100,000 a year after tax to $50,000. “Otherwise, things like working longer, even on a part-time basis, in combination with reduced spending would also help them to achieve their condo goals.”
Alternatively, Lyle and Tonia could consider renting one of the desired condos instead of buying. “In that case, they would have an additional $10,000 annually to spend toward condo rentals in addition to their existing travel budget of about $10,000 per year,” the planner says. “This may actually be preferable, since they would not need to worry about the cost and complexity that comes with maintaining two condos, especially as they get older.”
She recommends continuing to top up TFSAs annually, as long as there is cash flow and/or non-registered assets. “Beyond annual TFSA contributions, saving to your taxable account is recommended,” the planner says. “I would apply a balanced asset mix to TFSA accounts – 40-per-cent fixed income, 60-per-cent equities.”
As for a tax-efficient decumulation approach, it may make sense to defer CPP payments to at least age 65 to augment existing DB pensions. “I recommend revisiting this issue with an advice-only planner as they approach retirement.”
It may also make sense to begin registered retirement savings plan (RRSP)/registered retirement income (RRIF) withdrawals early on in retirement – prior to age 72 – to help mitigate taxes payable during their lifetime, she says. “Crunching the numbers with a planner at retirement will help Lyle and Tonia weigh their options.”
Client situation
The people: Lyle, 48, and Tonia, 53.
The problem: Can they afford to retire in seven years, sell their house and buy two condos without jeopardizing their standard of living.
The plan: Sell the house when they retire and then see how much money is available to buy the condos. They may decide to buy one and rent the other.
The payoff: A clear understanding of what is possible financially.
Monthly net income: $14,630
Assets: Bank account $6,000; joint non-registered stock portfolio $63,035; his TFSA $97,900; her TFSA $94,145; his RRSP $125,850; her RRSP $178,555; residence $650,000. Total: $1.2-million.
Pensions: Commuted or cash value of Lyle’s pension $1,167,830; commuted value of Tonia’s pension $760,255.
Monthly outlays: Mortgage $2,370; property tax $485; water, sewer, garbage $130; home insurance $225; electricity $195; heating $160; security $20; maintenance $100; garden $85; transportation $700; groceries $600; clothing $100; car loan $885; gifts, charity $195; vacation, travel $800; other discretionary $500; dining, drinks, entertainment $750; personal care $125; golf $205; subscriptions $160; life insurance $155; phones, TV, internet $385; pension plan contributions $1,680; unallocated spending $2,255. Total: $13,265.
Liabilities: Mortgage $425,490; zero-interest car loan $17,660.
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