Below you will find a real life case study of a couple who are looking for financial advice on when they can retire and how best to arrange their financial affairs. The names and details of their personal lives have been changed to protect their identities. The Globe and Mail often seeks the advice of our VP, Wealth Advisor, Matthew Ardrey, to review and analyze the situation and then provide his solutions to the participants.
Written by: DIANNE MALEY
Special to The Globe and Mail
Published November 10, 2017
Cruising into retirement, Steve and Donna plan to work part-time for another three years then hang up their hats for good. He is 65, she is 62. They have two grown sons, ages 26 and 28, a house in Alberta, some savings and no debt.
In addition to part-time income, Steve is collecting a work pension, while Donna, who is self-employed, is drawing a dividend from her company. Add it all up and they have been grossing nearly $120,000 a year.
Looking ahead, they wonder when they should begin taking government benefits, and what investment strategies would best allow them to achieve their goals. Their retirement spending target is $70,000 a year after tax.
Short-term, they plan to buy a new vehicle ($40,000) and a motorcycle ($25,000). Longer term, they plan to sell their house, downsize and buy a sailboat ($25,000).
Are they on track?
We asked Matthew Ardrey, a vice-president and financial planner at TriDelta Financial in Toronto, to look at Steve and Donna’s situation.
What the expert says
Steve’s employment income is currently $47,720, but will drop to $32,000 for 2018 and 2019, Mr. Ardrey notes. Donna’s work income is expected to remain constant at $10,567 through 2019. In addition Donna is drawing $11,123 of dividends, while Steve is getting pension income of $50,316 a year, indexed to inflation.
In his plan, Mr. Ardrey assumes the couple have arranged to split Steve’s pension income. After monthly expenses, they have a surplus of $1,800 a month, which they are saving to buy a new car and a motorcycle.
In 2019, Donna and Steve plan to sell their home for about $770,000 and buy a condo worth $415,000. Real estate transaction expenses are estimated to equal at least 10 per cent of the sale price, with the remainder of about $276,000 being invested. The following year, they plan to purchase a sailboat for $25,000.
Steve is contributing $7,440 a year to his registered retirement savings plan, which he should continue to do as long as he is working, Mr. Ardrey says. He has Steve taking Canada Pension Plan and Old Age Security benefits at 68 and Donna at 65, and assumes they both get full benefits. Inflation is forecast at 2 per cent a year.
First, Mr. Ardrey looks at their existing portfolio and its expected rate of return based on historical averages. That would be 2.8 per cent a year net of any account fees. “Though they have stated they would like a strategy for their investments, I felt running an ‘as is’ scenario would be interesting for comparison,” the planner says. Donna will increase her dividend to $11,600 a year to exhaust the funds in the corporation by the time she is 90.
Despite the low investment return, Steve and Donna are able to comfortably meet their retirement spending goal, Mr. Ardrey says. They would leave an estate of $1.7-million at Donna’s age 90.
If, instead, they spent all of their investments, leaving only real estate and personal effects, they would be able to increase their spending to $92,000 a year, the planner says.
Now he looks at how well off they would be if they increased their rate of return to 5 per cent a year and began contributing to tax-free savings accounts. When they downsize in 2019, they could each make a lump-sum TFSA contribution of $63,000 ($52,000 in accumulated room to 2017, plus $5,500 for 2018 and another $5,500 for 2019). “Though these changes may appear minor, their effect on the retirement lifestyle potential is major,” Mr. Ardrey says. In this forecast, Donna increases the dividend she draws to $13,000.
They would leave an estate of $4-million at Donna’s age 90. If, instead, they decide to exhaust all of their investments, leaving only real estate and personal effects, they would be able to increase their spending to $115,000 a year. Donna and Steve could either more than double the size of their estate, spend substantially more, or “some combination of the two.”
Donna and Steve’s entire investment portfolio is cash and Canadian equities. They have so much cash because they sold some stock recently and are hesitant about investing the proceeds. Mr. Ardrey suggests a balanced approach, with 50 per cent stocks or stock funds, 30 per cent fixed income and 20 per cent alternative investments. The equity portion would be diversified geographically (Canadian, U.S. and international) and the alternate investments by strategy (such as private debt, real estate, infrastructure).
While the returns on fixed income are low, “it is important to include it to insulate against equity market volatility,” the planner says. The alternative investments should help offset the low fixed-income returns and provide further diversification because of their low correlation to financial markets, he adds.
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The people: Steve, 65, Donna, 62, and their two sons.
The problem: How best to prepare for full retirement in three years, including when to draw government benefits and how to invest without undue risk.
The plan: Begin drawing government benefits when they retire fully. Open TFSAs and review their investment strategy to improve balance and diversification.
The payoff: The comfort of knowing they have achieved financial independence.
Monthly net income: $7,965
Assets: Bank accounts $6,500; her RRSP $31,040 (cash); $8,750 (stock); his spousal RRSP $78,015 (cash); $69,280 (stock); her business bank account $158,750; her business trading account $47,390 (cash); $55,450 (stock); estimated present value of his pension $274,000; residence $750,000. Total: $1.48-million.
Monthly outlays: Property tax $340; home insurance $50; utilities $365; maintenance, garden $395; transportation $405; groceries $900; clothing $370; gifts $300; charity $166; vacation, travel $850; other discretionary $100; dining, drinks, entertainment $300; personal care $100; sports, hobbies $100; subscriptions, other $40; health care $150; health, dental insurance $310; life insurance $137; telecom, TV, internet $133; RRSP $620. Total: $6,131. Surplus: $1,834
Liabilities: None
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Some details may be changed to protect the privacy of the persons profiled
