Tijana Martin/The Globe and Mail
Ruby is age 66, her husband Rhys is 74. “I’m still working part-time and wondering if I have to,” Ruby writes in an e-mail. Ruby’s earnings, Rhys’s withdrawals from his registered retirement income fund and their combined Canada Pension Plan and Old Age Security benefits give them total cash flow of $68,410 a year.
They have a mortgage-free condo in suburban Toronto where they plan to stay for the foreseeable future.
The couple married later in life and have no children. “Our life circumstances meant neither of us was a high income earner at a time when most people were reaching peak years of income,” Ruby writes. Neither has a work pension. Ruby is managing their investments “with online support” and doing well, she says.
“We’re very active, youthful, engaged seniors,” Ruby writes. “I’m afraid if I don’t have someone tell me I can retire, I may just keep working till I drop,” she adds. “All we need is to establish a retirement date ... combined with a thoughtful drawdown plan.” Their retirement spending goal is $45,000 a year, about what they are spending now.
We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Rhys and Ruby’s situation.
What the expert says
Ruby can afford to retire today but will only feel comfortable retiring if she’s sure it will not jeopardize their lifestyle or force them to sell their condo, Mr. MacKenzie says.
“It’s sensible to be cautious and to want to have confidence that you’ll never run out of money,” the planner says. “The best way to get this confidence is to have a financial plan that shows, based on reasonable assumptions, how things are expected to turn out even if you live to age 100.”
One potential cost Rhys and Ruby have to plan for as they grow older is health care, the planner says. “Although they’re in good health now, there is more than a 50 per cent probability that an individual who is over the age of 65 will eventually require some form of health care.” As one example, at some point they might find it difficult to manage their condo and decide to move to a private retirement home. “When individuals are in their 40s or 50s, an eight-year age difference is not significant,” Mr. MacKenzie says. “But when the younger spouse is in her 80s, an eight-year age difference might mean that in order to stay together, the younger spouse may need to move to a retirement home sooner than would otherwise be necessary.”
One scenario would be if when Ruby is 80 and Rhys is 88, for example, they both move to a retirement home with an annual cost of $60,000 per person per year in today’s dollars. “In this case, they would sell their condo at that time,” the planner says. The sale proceeds, plus their investments, would give them enough to pay for the retirement home until Ruby is 100, he says.
“If they never have the expense of a retirement home, they can live their desired lifestyle without ever having to sell their condo or tap into their home equity by way of a line of credit or a reverse mortgage,” the planner says. “One of the keys to their financial security is that they live a modest lifestyle.”
Rhys and Ruby have a net worth of $1.54-million, including the value of their condo. If Ruby retires immediately, they spend according to their budget, their condo appreciates at the rate of 2 per cent a year and their investments earn a net return of 4 per cent a year, within five years the planner projects their net worth will have increased by more than $100,000. The inflation rate could well be higher than the projected 2 per cent, so the plan should be updated annually or when their goals or circumstances change, Mr. MacKenzie says.
With regard to minimizing income tax, Ruby’s income never gets into the OAS clawback zone, but it does make sense to immediately start withdrawing at least $10,000 from her registered retirement savings plan each year because she will pay almost no income tax on these withdrawals. But if she leaves it until she begins making mandatory minimum withdrawals from her RRIF at the age of 72, her minimum withdrawal will be larger so she’ll pay income tax at a higher tax rate, the planner says.
If Ruby retires now, their combined CPP of $18,170, OAS of $15,240 and Rhys’s minimum RRIF withdrawal of $15,025 will give them $48,435 – more than enough to cover their current level of spending, including income tax, Mr. MacKenzie says. “At least for the next five years, while they’re in good health, they should feel free to use an additional $10,000 a year of RRSP withdrawals on travel, hobbies, recreation or for supporting a cause they believe in,” the planner says.
Since leaving as much as possible to heirs is not their goal, “they should spend and enjoy this money while they’re in good health and they have active friends who they want to travel with.”
With regard to estate planning, Rhys and Ruby need an advocate who can look after their interests if the time comes when one is unable to manage financial and health issues, Mr. MacKenzie says. “It is very important that they update their wills and find someone they trust who is willing to act as power of attorney for personal care and property.”
Ruby manages their investments and has done a good job of it, the planner says. “However, if Ruby is like most people, when she gets into her late 80s, she may become less confident about choosing investments and executing a sensible investment strategy,” he adds. “If they are thinking of using the services of an investment professional, they should start the search while they’re confident they can properly evaluate potential advisers and investment proposals.”
Ruby and Rhys’s asset mix is about 70 per cent dividend stocks – almost entirely Canadian – and 30 per cent cash and guaranteed investment certificates. Since stock markets are near their highs, and they have enough to achieve their goals if they earn a 4 per cent average rate of return, they are taking more stock market risk than is necessary, Mr. MacKenzie says. Because Canada represents only about 3 per cent of the world stock market, to improve the risk/return ratio of their portfolio, they should reduce their exposure to Canadian equities and become more globally diversified, he says.
Client situation
The people: Rhys, 74, and Ruby, 66
The problem: Can they afford for Ruby to retire now without jeopardizing their lifestyle?
The plan: Ruby can retire now as long as they keep to their existing budget.
The payoff: Financial peace of mind and the possibility of enjoying more travel with friends while they’re in good health.
Monthly net income: $5,350
Assets: Cash $10,000; her TFSA $39,000; his TFSA $37,910; her RRSP $308,205; his RRSP $264,915, residence $880,000. Total: $1.54-million
Monthly outlays: Condo fees (includes utilities) $1,030; property tax $245; home insurance $35; transportation $365; groceries $400; clothing $75; gifts, charity $170; vacation, travel $250; dining, drinks, entertainment $350; personal care $25; club membership $40; sports, hobbies $25; subscriptions $25; doctors, dentists $135, drugstore $70; vitamins and supplements $225; health insurance $100; communications $145. Total: $3,710
Liabilities: None
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Some details may be changed to protect the privacy of the persons profiled.
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