Theo and Evelyn's goals are to pay off the mortgage, grow their investments and travel more.Todd Korol/The Globe and Mail
For the 34 years they’ve been married, Theo and Evelyn have operated a profitable franchise business in Ontario. While they will retain ownership, they have passed on the day-to-day operations of the business to their son.
Earlier this year, they sold the family home and moved to Alberta to be closer to family. They plan to travel back to Ontario for the summer to help out with the business, drawing a salary to supplement their part-time jobs in Alberta.
Theo’s income last year was $54,885 and Evelyn’s $33,600.
“We are trying to figure out what is the best way to move forward for retirement and what pot to draw from first,” Evelyn asks. They wonder, too, when to begin collecting government benefits.
Their goals are to pay off the mortgage, grow their investments and travel more, Evelyn writes. Their retirement spending target, including more travel, is $7,500 a month after tax.
We asked Amit Goel, a partner and portfolio manager at Hillsdale Investment Management Inc. of Toronto, to look at Theo and Evelyn’s situation. Mr. Goel holds the chartered financial analyst (CFA) and certified financial planner (CFP) designations, among others.
What the Expert Says
Theo and Evelyn plan to draw $26,000 a year from their business for the rest of their lives, Mr. Goel says. “In addition, they will continue to own and manage the company’s investment portfolio, which will be used toward their retirement goals,” he says.
They plan to work part-time for another five years and expect to generate an annual combined income of $60,000, which would cover most of their lifestyle expenses excluding their mortgage.
Their main goal is to be able to travel more during retirement, Mr. Goel says.
In preparing his forecast, the planner uses the following assumptions: an inflation rate of 2.1 per cent, a rate of return on short term investments of 2.3 per cent, fixed-income investments 3.2 per cent and stocks 6.5 per cent (after fees). He assumes a life expectancy of 95 years and that the value of their house rises by an average of 1 per cent a year.
The couple can easily sustain their existing lifestyle expenses of $5,000 per month (excluding the mortgage) over the next five years through business income and part-time earnings, Mr. Goel says. “Hence, there is no pressing need to start collecting Canada Pension Plan benefits earlier, as that would reduce the CPP benefits for the rest of Theo’s life by 36 per cent,” the planner says.
“Over the next five years, the couple should aim to become debt-free by paying off their mortgage, drawing from their $300,000 in guaranteed investment certificates maturing over the next three years.”
When they retire after five years, the couple can expect to have a financial portfolio valued at between $750,000 and $850,000, almost evenly split across registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), non-registered accounts and their company investment portfolio, Mr. Goel says. In addition, they will continue to receive an annual income of $26,000 from their business.
“To meet their travel plans and higher spending goals of $7,500 per month in today’s dollars, the couple will need to withdraw 8 to 10 per cent from their financial portfolio each year,” the planner says. “Such a high withdrawal rate is not sustainable for 30 years.”
During the first phase, they can travel and spend more. During the second phase, they can scale back to normal spending levels ($5,000 per month in today’s dollars). As a result, their average withdrawal rate is projected to be 6 per cent over the next 30 years.
Alternatively, they can choose to work for another four years, which will allow them to save more and defer CPP and Old Age Security benefits to age 70. In this situation, they would be able to spend $7,500 per month throughout the entirety of their retirement, Mr. Goel says.
Another option would be to retire as planned but reduce their spending goals to $6,250 per month throughout retirement.
With plans to travel more, the couple would need to generate $90,000 (in today’s dollars) post-tax during the first phase of their retirement. They would have three main sources of cash flow: annual business income of $26,000, blended withdrawals from their investment portfolio, and CPP and OAS benefits.
If they defer CPP and OAS to age 70, they will enjoy higher pension income for the rest of their lives. However, this would require them to withdraw more than 10 per cent from their investment portfolio, which could prove to be difficult, especially during volatile financial markets, Mr. Goel says.
“Hence, it is recommended that they start collecting CPP and OAS benefits at age 65.” This would allow them to lower the portfolio withdrawal rate to about 8 per cent. While this withdrawal rate is still high, they can plan for this by increasing cash and low-risk holdings within the portfolio.
“As part of the lower-risk strategy, the couple should start reducing equity allocation and split their investment portfolio into three distinct buckets with different goals,” he says.
For safety and emergency funds, they should keep three to five years of cash flow needs (25-40 per cent of the portfolio) in cash, guaranteed investment certificates and other cash equivalents.
To beat inflation, they could create a second bucket of stable growth securities. This can be a mix of low-volatility, dividend-generating, tax-efficient investments with the potential to grow over the long term. These securities could comprise another 30-40 per cent of their portfolio.
For their legacy or long-term holdings – the portfolio that they may not need to withdraw from in the next 10 years – they could invest more aggressively. This will help them outpace inflation and continue to grow their investment portfolio. This could be 20–30 per cent of their portfolio.
The couple should follow a dynamic investment and cash reserve strategy, the planner says. “When equity markets are way up, they can sell more and fill up the cash reserves. When equity markets are down, they do not sell equities, but take out funds from the cash reserves. However, when markets are way down, they could dip into cash reserves and buy more.”
A blended withdrawal from their non-registered, TFSA, RRSP and holding company accounts will keep their tax bill low, he says. They could choose to convert some of their RRSPs to registered retirement income funds earlier (at age 65) to take advantage of the federal pension income tax credit on up to $2,000 of eligible pension income.
At the start of the second phase of their retirement, when Theo is 80, the couple’s financial portfolio is projected to be reduced to about $500,000. “The good news is that the portfolio is expected to continue to stay at this level for the rest of their lives, providing them enough for emergency and health-care needs,” Mr. Goel says.
Client Situation
The People: Theo, 60, Evelyn, 57, and their four adult children, ages 25 to 33.
The Problem: When should they take government benefits? How should they draw down their savings? Can they afford to spend more on travel without jeopardizing their financial future?
The Plan: Pay off mortgage before they retire. Divide retirement into two 15-year phases. Spend more on travel during first 15 years, less in the second phase. Take CPP and OAS at age 65.
The Payoff: A clear path forward with a better understanding of how to map out their financial future.
Monthly net income: $6,300.
Assets: Joint non-registered (guaranteed investment certificates and stocks) $447,000; his RRSP $95,500; his TFSAs $17,000; her RRSP $62,500; her TFSA $96,000; corporate investment account $124,000; residence $400,000. Total: $1,242,000.
Monthly outlays: Mortgage $1,300; property tax $315; water, sewer, garbage $85; home insurance $140; electricity, heat $235; security $40; maintenance $235; transportation $720; groceries $550; vacation, travel $500; gifts, charity $300; dining, drinks, entertainment $450; personal care $200; subscriptions $40; life insurance $40; cellphones $200; TV, internet $200; unallocated expenses $550; TFSAs $200. Total: $6,300.
Liabilities: Mortgage $196,220, variable rate.
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Some details may be changed to protect the privacy of the persons profiled.
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