Brandy and Larry are concerned about leaving an estate for their children.Blair Gable/The Globe and Mail
At age 64, Larry and Brandy want to “slow down and achieve a better balance in life” by working a little less at their successful consulting company, Larry writes in an e-mail. But with no pension plans, they worry whether they and their three adult children will be secure financially.
The children range in age from 24 to 33 and two still live at home.
Combined, the couple are drawing a salary of $134,000 a year. They have a mortgage-free house in a major Ontario city as well as a cottage.
Like many parents, Brandy and Larry are concerned about leaving an estate for their children. “We want to help lift them up and leave a financial legacy,” Larry writes. Or gift it to them earlier, “at least enough money for weddings, additional education or house down payment and support.”
They have received conflicting advice which has left them feeling confused.
“Our accountant says we will have to sell our house when we are 80 after drawing down all our investments,” Larry writes. “That was a shocking thought since we want to live in the house until we die.”
The opposing view from an estate planner: “You have no issue at all,” although they did recommend life insurance to cover estate taxes.
Their questions: “What is the most likely retirement scenario for achieving our goals? Is the family secure financially with no pension to draw on? Can we leave an inheritance to our children without having to sell the cottage?”
Their retirement spending target is $9,000 a month after tax, roughly what they are spending now, excluding savings.
We asked Matthew Ardrey, a portfolio manager and senior financial planner at TriDelta Private Wealth in Toronto, to look at Larry and Brandy’s situation. Mr. Ardrey holds the certified financial planner (CFP) and the advanced registered financial planner (RFP) designations.
What the Expert Says
Larry and Brandy are on the cusp of retirement and want to make sure they are ready for the next phase of life, Mr. Ardrey says. They also want to leave assets behind for their children.
They have had differing recommendations from their advisers as to how to achieve those goals, the planner says. “One adviser recommended insurance through the corporation for their estate goals and another told them they did not need it as they could self-insure by having a larger investment portfolio.”
Larry and Brandy co-own a company where they are 50/50 shareholders. As well as being an operating company, it also holds investments for them of about $1-million. All of their income comes through this company.
They recently got a new contract that will keep them employed for the next three years with Larry earning $110,000 a year and Brandy $80,000 a year, Mr. Ardrey said. They are saving $1,000 a month to RRSPs, $1,000 to their tax-free savings accounts and $125 to a registered disability savings plan for one of their children. “All else is assumed to be spent.”
With the new three-year contract, they plan to defer taking Canada Pension Plan and Old Age Security benefits to at least age 68, the planner said. “We would recommend extending the deferral to age 70 to create as large of an annuity as they can from government pensions because they have no other pension income.”
Outside of the corporate assets, they have another $1.4-million invested in various personal accounts both registered and non-registered. That includes a bank account that they use as an emergency fund. “Notably absent are TFSAs.” They used their TFSAs to pay off a loan this year and plan to replenish them in 2025.
“In correspondence with Larry and Brandy, they note they prefer the insurance option over the increased investments” to secure their estate, the planner says. “Part of this need for certainty is because they want to support a child with a disability after they are gone,” Mr. Ardrey says. “Thus, we assume they will proceed with the $1-million permanent insurance paid through the corporation.”
This still leaves assets in the corporation that Brandy and Larry can spend. They can generate dividends of $33,600 per year through retirement to exhaust the corporate assets by age 95, he said.
The currently portfolio structure is 10 per cent cash, 44 per cent fixed income, 33 per cent Canadian stocks and 13 per cent alternative investments. The return is an estimated 4.23 per cent a year with 1.13 per cent in fees.
“Based on the planned spending of $108,000 per year, they can meet their retirement goal in the straight-line return scenario,” Mr. Ardrey said. That assumes they earn a steady return on their investments year after year. In reality, the estimated rate of return is an average over the forecast period. Neither the house nor the cottage needs to be sold.
“To truly understand the risk in this plan, we need to move beyond the straight-line projection, as we know that life and investments rarely ever move in a straight line,” the planner said. “To ensure the viability of this plan, we stress test it by using a Monte Carlo simulation. This introduces randomness to a number of factors, including returns, to stress-test the success of a retirement plan
He ran 1,000 iterations with the financial planning software to get the results. For a plan to be considered “likely to succeed” by the program, it must have at least a 90 per cent success rate, meaning at least 900 trials out of 1,000 succeed. If it is below 60 per cent, then it is considered “unlikely.” Between those numbers success is “somewhat likely.”
Based on the Monte Carlo simulation, the chance of success is 87 per cent, or somewhat likely to succeed, the planner said.
“They can improve their investment strategy and lower their costs by engaging the services of a portfolio manager with a focus on income generation,” Mr. Ardrey said. “There are many solid investment options with strong yields that when combined with some moderate growth can earn returns of 5 per cent net of fees with a lower moderate risk rating,” he said. This can be done in such a way that they maintain a lower volatility risk, which also improves the Monte Carlo analysis results.
Along with the improvement in returns, they should maximize their RRSPs while they are still working and continue to save to TFSAs annually for their lifetime.
“With a new strategy that improves returns and takes advantage of all of the registered accounts, the Monte Carlo analysis improves to 100 per cent,” the planner said.
On the estate side, with an improvement in returns, less is needed from the corporation during Larry’s and Brandy’s lifetime, he said. Thus, these funds can be used to enhance the estate goal by increasing the life insurance to $2-million if they choose. Even after paying for the higher insurance amount, they would still be able to draw an annual dividend from the corporation of $22,800 to age 95, Mr. Ardrey said.
The effect on the estate of this strategy is material. In the current plan, they have a projected estate of $3.3-million after-tax, versus $5.7-million in the recommended plan.
Client Situation
The People: Larry and Brandy, both 64, and their three children.
The Problem: Maintaining their lifestyle spending while preserving their capital so they can leave a solid estate to their three children.
The Plan: Defer government benefits to age 70. Replenish their TFSAs. Buy at least $1-million in life insurance through the corporation. Take steps to possibly improve investment returns.
The Payoff: Financial goals achieved.
Monthly net income: $13,000.
Assets: Bank account $160,000; corporate investments $1,000,000; his RRSP $600,000; her RRSP $650,000; residence $1,300,000; cottage $600,000. Total: $4.3-million.
Monthly outlays: Property tax, house and cottage $1,500; water, sewer, garbage $150; home insurance $230; electricity $130; heating $225; maintenance $400; garden $100; transportation $265; groceries for four $2,000; clothing $50; vacation, travel $1,100; dining, drinks, entertainment $975; personal care $300; pets $100; sports, hobbies $500; subscriptions $100; health care $200; phones, TV, internet $550; RRSPs $1,000; TFSAs $1,000; registered disability savings plan $125. Total: $11,000.
Liabilities: None.
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