November 8, 2022. Amber Bracken for The Globe and MailAmber Bracken/The Globe and Mail
Ed and Lisa would like to retire from work next year with income “at least the same or greater than they have now,” Ed writes in an e-mail. He is 62, she is 63.
Ed earns $95,550 a year working for the government and Lisa earns $45,000 as an administrator. Ed will be entitled to a pension of $50,150 a year at age 63 and Lisa – who came to the work force late – will get about $10,000 a year at age 65.
They live on a farm in rural Alberta and have raised four children, now in their late 20s and early 30s. The younger two are still living at home and going to university.
Ed’s plan is to transition from full to part-time employment, deferring government benefits to age 70 and drawing down his registered retirement savings plan in the meantime. He would “graduate” to full retirement some time between age 65 and 70, he writes. Short-term expenses include buying private health and dental insurance, replacing major appliances and doing some work on their house. They also need to replace their car and truck.
Longer term, they hope to take a couple of out-of-country trips each year. Their retirement spending goal is $106,000 a year after tax.
We asked Jason Heath, an advice-only financial planner at Objective Financial Partners in Markham, Ont., to look at Ed and Lisa’s situation.
What the expert says
Ed and Lisa have ambitious plans for retirement that include increasing their current spending, Mr. Heath says.
In preparing his forecast, he has assumed that their target $106,000 of after-tax spending is maintained for life, adjusted for 2-per-cent inflation. “Although inflation has been nearly 7 per cent over the past year, the Bank of Canada expects it to subside to about 4 per cent in 2023 and hopefully return to their 2 per cent long-term target shortly thereafter,” the planner says.
He assumed that Ed and Lisa replace both their vehicles at a total cost of $125,000 net of trade-in value and complete a $50,000 house renovation in the coming year, as well as paying off their small line-of-credit balance. This would exhaust their non-registered investments and some of their tax-free savings account balances.
Although Ed plans to work part-time after 2023, Mr. Heath assumed they both worked only a few months in 2023 before retiring. He did not factor in any part-time employment income for either of them.
“If their investments return a modest 4 per cent per year net of fees, their portfolio of about $850,000 is projected to be depleted by Ed’s age 95,” Mr. Heath says. This projection assumes they do not downsize their home or use any home equity.
Their investments are projected to be drawn down significantly in the next few years to an estimated $400,000 by Ed’s age 70. From that point onward, the depletion is projected to be relatively modest once Canada Pension Plan and Old Age Security benefits kick in, with the potential for small TFSA withdrawals beyond Lisa’s minimum RRIF withdrawals, mostly in their 80s. “They should consider the asset allocation for their non-registered investments in particular given the potential to use most or all of those funds in the next year or two.”
If Ed and Lisa continue to work part-time for a few more years, it could serve to pad their travel budget or provide funds to help their children or future grandchildren, the planner notes. “I do feel that at this point they will be working because they want to as opposed to because they have to.”
The 4-per-cent return assumption seems conservative, given their portfolio yields about 4.6 per cent now in dividends alone, the planner says. “But as they get older, they may be less aggressive investors.” The conservative return also considers the variability of returns from year to year; they are not going to earn 4 per cent in a straight line. “Arguably, the downside risk early in retirement for stock markets is mostly behind them, after a terrible 2022 for stock and bond markets,” Mr. Heath says.
Their portfolio is made up primarily of financials, pipelines, telecommunications and utilities. These stocks tend to pay higher dividends – thus, their 4.6-per-cent dividend yield on their portfolio – but represent a narrow sector allocation. Absent are sectors such as technology, health care, consumer, industrials and materials that may give them better diversification or capital growth to complement their dividend income, he says.
“It bears mentioning that replacing group health and dental coverage in retirement may not be better than paying for these expenses out of pocket,” the planner says. “If you have a retiree plan through your employer where they may be contributing to the cost, that could be advantageous,” he says. But when you are securing a private policy, you may end up paying more in premiums than you get back in reimbursements, especially given your premiums can change from year to year.
Mr. Heath suggests the couple update their wills, which were prepared when their children were young. Their RRSPs and TFSAs can be dealt with efficiently on the first death by naming each other as the beneficiaries and successor holders, respectively, he notes. “They really should prepare Alberta enduring powers of attorney and personal directives to appoint each other – and at least one replacement – to make financial and health care decisions if they are incapacitated,” he says. These are important estate planning documents that they apparently do not have currently.
Lisa has $46,500 of RRSP room but it probably does not make sense to contribute further given her relatively low income. Her projected tax rate in retirement is similar to or higher than it is now, so paying the same or more tax on withdrawal than the tax rate saved on contributing is not advantageous. “Besides that, they may need their non-registered savings for the renovation and car replacements in the next year or two.”
The planner is generally in favour of deferring CPP and OAS to age 70 for people who are in good health. “If you live well into your 80s, you will receive more lifetime income by doing so,” he says. “It means you need to draw down on your investments more prior to 70, but investments provide a riskier form of retirement income than government-guaranteed, inflation-protected CPP and OAS anyway.”
Client situation
The people: Ed, 62, Lisa, 63, and their four children
The problem: Can they afford to retire from work next year with a budget even higher than they are spending now?
The plan: Go ahead and retire, drawing on Ed’s RRSP, working part time and deferring government benefits.
The payoff: A retirement spending goal that will cover their current needs and leave them plenty of wiggle room for the future.
Monthly net income: $7,750
Assets: Non-registered accounts $180,255; his TFSA $115,000; her TFSA $130,000; his RRSP $65,000; her spousal RRSP $360,000; registered education savings plan $24,000; estimated present value of his DB pension $950,000; estimated present value of her DB pension $200,000; residence $450,000. Total: $2.47-million
Monthly outlays: Property tax $500; water, sewer, garbage $200; home insurance $215; electricity $200; heating $225; maintenance $500; transportation (insurance, fuel, oil changes maintenance, parking) $850; groceries $895; clothing $110; line of credit $70; gifts, charity $125; vacation, travel $210; other discretionary $110; dining, drinks, entertainment $215; personal care $140; club membership $35; sports, hobbies $200; subscriptions $75; health care $20; life insurance $85; communications $225; RRSPs $1,435; TFSAs $1,000; pension plan contributions $295. Total: $7,935
Liabilities: Home equity line of credit $16,000 at 5.4 per cent
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