Matthew and Lizzy.Jennifer Roberts/The Globe and Mail
Matthew works as a consultant, earning about $180,000 a year, although it varies. Lizzy works in sales, earning $80,000 a year. He is 57, she is 56. They are hoping to quit working in three years or so.
Short term, their goals are to renovate their house. Longer term, they might sell the house and move to a smaller town. They want to travel while they are still healthy and help their two children, 23 and 26, with a down payment on a first home.
Neither has a defined benefit pension but they do have about $1.3-million in savings and investments. They also have an investment property with a mortgage. Now that mortgage rates have risen, the property is cash-flow negative by about $500 a month. “We will most likely sell it off in 2030,” Matthew writes in an e-mail.
“Will we be in a position to retire at age 60 with our target of $100,000 a year in after-tax income and not worry about running out of money?” Matthew asks. “In what order do we deplete our savings in retirement?”
We asked Mike Burns, a certified financial planner at Objective Financial Partners Inc. in Markham to look at Matthew and Lizzy’s situation.
What the Expert Says
Matthew and Lizzy are contributing $2,000 per month to their registered retirement savings plans and $1,165 per month to their tax-free savings accounts, Mr. Burns says.
They should consider opening a spousal RRSP for Lizzy to which Matthew can contribute, the planner says.
“Lizzy has almost $400,000 less in registered assets than Matthew does,” Mr. Burns says. Although spouses can split their registered retirement income fund, or RRIF, withdrawals after age 65, Lizzy and Matthew plan to retire before then. As well, the pension income-splitting rules could change in the future.
“Given that Matthew has a higher income than Lizzy, this means that Matthew will receive a tax refund on RRSP contributions of 45 per cent, his marginal tax rate, compared to 30 per cent for Lizzy,” the planner says. “So they should definitely prioritize Matthew’s RRSP contributions over Lizzy’s.”
Matthew has $37,000 in unused RRSP contribution room and Lizzy has $180,000.
Matthew and Lizzy both have healthy TFSA balances. Continuing to maximize their TFSA contributions make sense because it will increase the amount of tax-free assets they have, the planner says. “That said, they could tap their TFSAs to get Matthew’s $37,000 of unused RRSP room maxed out right away.”
The planner assumes Matthew and Lizzy will require $50,000 for a home renovation in 2027 and that they are targeting a gift of $100,000 to each of their two children in 2028. Matthew and Lizzy could use funds in their TFSAs for these goals, he says. “If they want to play it safe, they could reduce their stock market exposure as the withdrawals approach,” he suggests.
If Lizzy and Matthew wanted to stay fully invested, they could potentially use a home equity line of credit for the anticipated outlays. That would avoid having to sell their TFSA investments at a potentially inopportune time, Mr. Burns says. “Not everyone would be comfortable with that approach.”
Matthew and Lizzy may want to look into setting up a line of credit if they do not have one already. “They may never use it, but it is easier to get one prior to retiring than after,” the planner says
As for the investment property, if they sell it in 2030 and they have substantial equity in it, they will not need to downsize their house for financial reasons. Their investments are projected to last them for the rest of their lives. Matthew and Lizzy’s decision to move to a smaller market than the Greater Toronto Area may be more of a lifestyle choice than a financial one, the planner says.
Matthew and Lizzy also wonder about the best way to decumulate their investments. It would be worth considering RRSP withdrawals early in retirement even though they do not need to take withdrawals until age 72, Mr. Burns says. This could keep them in a lower average tax bracket throughout retirement.
When Matthew and Lizzy reach age 65, they will be able to split up to 50 per cent of their RRIF income to keep their incomes as equal as possible and to minimize household income taxes, the planner says.
Canada Pension Plan can be taken as early as age 60 and as late as age 70. Old Age Security can be taken as early as age 65 and as late as age 70. There is a premium for waiting to receive these benefits. “Waiting can definitely be a prudent move the longer we assume for life expectancy, so the decision on when to take the benefits should be in part based on their health when they retire,” Mr. Burns says.
The fact they have no defined benefit pensions is a reason to consider deferring their government pensions to age 70 and drawing down investments in the early retirement years instead, the planner says. Additional funds to get Matthew and Lizzy up to their $100,000 annual spending goal can be drawn down from their TFSAs or initially from non-registered funds.
Matthew and Lizzy have invested in a private equity real estate fund. “Something to keep in mind regarding their private real estate investments, or any private investments, is that selling these holdings is not like selling a more liquid stock or bond,” Mr. Burns says. These investments are designed to be held long term and there may be periods where it can take some time to sell them and convert them to cash.
“Just something to be mindful of approaching or entering retirement as you evaluate your liquidity and withdrawal needs.”
Client Situation
The People: Matthew, 57, Lizzy, 56, and their two children, 23 and 26.
The Problem: Can they afford to retire at age 60, help their children financially and still spend $100,000 a year?
The Plan: Open a spousal RRSP for Lizzy to which Matthew contributes to help equalize their income and hence lower the family tax bill over time. Consider taking RRSP withdrawals early in retirement. Split RRIF income when they turn 65.
The Payoff: Enough money to last a lifetime and achieve all of their financial goals.
Monthly net income: Variable.
Assets: Cash $20,000; private equity real estate fund – his share $110,000; her share $75,000; his TFSA $182,490; her TFSA $147,475; his RRSP $631,265; her RRSP $281,760; residence $2,200,000; investment property $800,000. Total: $4.4-million.
Monthly residence outlays: Property tax $835; water, sewer, garbage $60; home insurance $100; electricity $110; heating $150; maintenance $200; garden $150; transportation $350; groceries $250; clothing $420; gifts, charity $750; vacation, travel $1,000; dining, drinks, entertainment $725; personal care $150; club memberships $100; golf $50; pets $140; sports, hobbies $100; subscriptions $50; doctors, dentists $300; life insurance $350; phones, TV, internet $360; RRSPs $2,000; TFSAs $1,165. Total: $9,865.
Liabilities: Investment property mortgage $491,000 at 6.9 per cent.
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