Malcolm and Laura's target retirement cash flow is $90,000 a year after tax, including a $15,000-a-year travel budget.Ashley Fraser/The Globe and Mail
Malcolm and Laura retired relatively young – he was 57 and she was 54 – and they’re wondering if they made the right decision.
Nearly three years have passed since Malcolm left behind a successful career in sales. He is now 60 and just starting to take early Canada Pension Plan benefits. Laura is 57. They want to help their daughter, who is 25 and living at home, with a down payment on a first home. They have a mortgage-free house in small-town Ontario and substantial savings and investments, including Malcolm’s locked-in retirement account, or LIRA, a type of employer pension plan.
Their target retirement cash flow is $90,000 a year after tax, including a $15,000-a-year travel budget.
“Will we have enough to live comfortably for the rest of our lives?” Malcolm asks in an e-mail.
We asked Warren MacKenzie, a certified financial planner, to look at Malcolm and Laura’s situation. Mr. MacKenzie also holds the chartered accountant designation.
What the expert says
Malcolm and Laura are wondering if they can they continue to spend $90,000 a year and still help their daughter buy a house. “The bottom line is yes,” Mr. MacKenzie says.
The $90,000 they want to spend each year includes contributions of $14,000 a year to their tax-free savings accounts, he notes. These should be considered investments rather than expenses. They plan to continue the contributions.
“They’ve made some wise decisions and there are some other things that they should consider doing,” Mr. MacKenzie says. “Whether it is to help their daughter buy a house or enjoy more winter travel, one of the first things they should do is to become clear on their long-term goals.”
Based on reasonable assumptions – an inflation rate of 2 per cent and investment returns averaging 5 per cent – his financial forecast shows that if they make it to age 100, they’ll still be leaving their daughter more than $2-million in today’s purchasing power.
“Given that their daughter is fully employed and is acting in a responsible way, a $2-million inheritance is more than necessary,” the planner says. “There is no reason for them to cut back on their spending in order to leave an even larger estate.”
As well, with 30 to 40 years ahead of them, they should make a point of getting involved in their community and supporting some worthwhile causes, he says.
“The key to their financial independence was being frugal. After a lifetime of being frugal, it will not be easy for them to loosen the purse strings and spend more.”
Malcolm started collecting his CPP at age 60 because he has a health condition that he says makes it unlikely that he will live much beyond age 80, Mr. MacKenzie says. Malcolm believes he will collect about $50,000 during the five years before age 65.
“He expects that as this money is invested and grows, it could earn about $3,000 per year, and that would largely compensate for not receiving the higher pension at 65.” By starting his CPP at age 60, his benefits will be about 35-per-cent lower than they would be had he started at age 65.
Laura expects to live well into her 80s so she’s decided to delay her CPP until age 70, Mr. MacKenzie says. If Laura outlives Malcolm, his Old Age Security benefit would end but she would have all the investment income, and her CPP would increase to the maximum for one person. Her own CPP is now less than the maximum.
When the time comes that they need health care or a nursing home, they’ll sell their house. “With their investment portfolio, the proceeds from the sale of their house and their CPP and OAS, there will be plenty to fund their expenses until age 100 and still leave a significant estate,” Mr. MacKenzie says.
As for helping their daughter, they should immediately use some of their non-registered cash and gift her $16,000 to open a first home savings account, he says. She could make the maximum deposits of $8,000 each for 2023 and 2024. The maximum contribution to a FHSA is $8,000 per year up to a lifetime total of $40,000. “This will mean the income on $40,000 will be earned on a tax-free basis.”
Given that they have a surplus, they might also consider giving their daughter inheritance advances in addition to the FHSA funding so she can learn to invest, Mr. MacKenzie says. This will give her an opportunity to make her own mistakes with smaller amounts of money.
Mainly to save on investment management fees, Malcolm recently became a do-it-yourself investor, the planner says. Malcolm spends three or four hours a week gathering information and updating his Excel worksheets.
About 65 per cent of their portfolio is in stocks and Malcolm seems satisfied with his picks. Still, he should have a benchmark against which he can measure his performance. That way he can tell if his individual stock holdings are doing better than comparable exchange-traded funds.
“Malcolm’s investment focus is on trying to find the best investment products,” the planner says, “but over the longer term, investors get the best results by following a disciplined rebalancing investment process.” For example, if their stocks fell from 65 per cent of the portfolio to 55 per cent, Malcolm would rebalance by buying shares at the lower price to bring the allocation back to 65 per cent. If they rose in value, he would sell some to bring his exposure back to the target.
Laura has no interest in investing and would find it difficult if anything happened to Malcolm, Mr. MacKenzie says. “Malcolm should consider interviewing several professional investment managers who operate as fiduciaries,” which means they must put their clients’ interests first. “Then if anything happened to Malcolm, Laura could move the funds to the manager Malcolm recommended.”
Malcolm and Laura likely will never be in a lower income-tax bracket than they are now, the planner says. So it makes sense for them to tap their RRSPs and Malcolm’s LIRA now, while their income is relatively low, to make their tax-free savings account contributions. Their TFSA income will not be taxed and can be withdrawn tax free.
This will mean that in the future their income from mandatory RRIF withdrawals will be lower and therefore they will be less likely to have their OAS clawed back, he says. Over the long term, they will benefit by splitting their taxable income so that they each have about the same amount, he adds.
In 2024 their cash flow will consist of Malcolm’s CPP of $9,876 and a total of $50,000 from his RRSP and LIRA. That, plus $50,000 from Laura’s RRSP, will give them a total of about $110,000. “Because the LIRA has less flexibility, Malcolm should take the maximum possible from the LIRA and the balance from his RRSP, Mr. MacKenzie says. “Their planned cash outflow will be basic spending of $65,000, travel $15,000, $14,000 to their TFSAs and $18,000 in tax.” Any shortfall will come from cash in their bank accounts.
The forecast assumes they both take Old Age Security benefits at age 65.
When Laura starts her CPP at age 70, she will be getting about $20,000 in CPP and $11,000 in OAS. That’s in about 13 years. The benefits will rise in line with inflation. Malcolm will be getting about $13,000 in CPP and $11,000 in OAS, for a total of $55,000. With about $2-million in investments and a 5-per-cent average rate of return, they expect to earn $100,000 from their investments, for a total of $155,000, the planner says.
Their target spending includes $83,000 in basic living costs, $20,000 for travel, $20,000 in income tax, and $20,000 for their TFSA contributions, for a total outflow of $143,000.
Client situation
The people: Malcolm, 60, Laura, 57, and their daughter, 25.
The problem: Will they run out of money because they retired so early? Can they afford to help their daughter buy a home?
The plan: Withdraw from their RRSPs and Malcolm’s LIRA while their income and tax bracket are low. Malcolm should take as much as possible from his LIRA first. Give their daughter the money to open a first home savings account.
The payoff: The freedom to help their only child and to loosen the purse strings a bit if they want to.
Monthly net income: As needed.
Assets: Bank accounts $70,000; guaranteed investment certificates $40,000; non-registered stock portfolio $175,000; his LIRA $499,500; his TFSA $129,400; her TFSA $139,600; his RRSP $255,400; her RRSP $738,200; residence $700,000. Total: $2.7-million.
Monthly outlays: Property tax $325; water, sewer, garbage $15; home insurance $90; electricity $165; heating $100; maintenance $200; car insurance $110; fuel, oil, maintenance $500; groceries $1,500; clothing $50; gifts, charity $195; vacation, travel $1,500; dining, drinks $500; personal care $25; club membership $10; golf $40; pets $150; subscriptions $25; health care $90; health, dental insurance $125; phones, TV, internet $190; TFSAs $1,165. Total: $7,070.
Liabilities: None.
Want a free financial facelift? E-mail finfacelift@gmail.com.
Some details may be changed to protect the privacy of the persons profiled.
