Couple want to retire in their 50s

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Traditional financial planning models are designed to build portfolios that will fund a 30-plus-year retirement after age 65. But what do you do if your goals don’t align with that model?

That’s the question Manitoba married couple Frank* and Heather are trying to figure out.

“We want to seize the day,” he said.

In this case, that day will happen in three years, when Heather turns 50 and fully retires and Frank turns 59 and partially retires. For years, they have been working overtime, eliminating debt and saving as much as possible to realize this vision for a compelling reason.

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“Heather is extremely healthy today, but she is also a childhood cancer survivor and has had a few health scares,” Frank said. “Given all that she’s been through, we don’t want to wait until 65 to retire.”

Both Frank and Heather work in health care and bring in a combined annual income of about $200,000 a year before tax. Frank is self-employed and once he shifts to working part time, he anticipates his annual income will decrease to about $50,000.

A self-taught do-it-yourself investor, Frank has built a $1.6-million investment portfolio that generates about $52,000 a year in dividends. The couple reinvests this money into their registered retirement savings plans (RRSPs, $880,000) and tax-free savings accounts (TFSAs, $260,000). These accounts are largely in Canadian stocks with a global footprint. The RRSPs also include $175,000 in guaranteed investment certificates (GICs).

They also have $109,000 in locked-in retirement accounts (LIRAs) and $70,000 in a registered education savings plan (RESP) for their daughter, who has just completed her first year of university. The LIRAs hold segregated mutual funds and the RESP holds a mutual fund, something Frank is not happy about. Heather will also receive a $300,000 employer pension that she plans to convert to a LIRA when she stops working.

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They’d like to spend three or four months each winter in a warmer climate when they retire. Their current monthly expenses are about $7,800 and they anticipate they will stay in this range (plus inflation) going forward. The couple is debt free, owns a home valued at $550,000 and has no plans to downsize.

“How can we pull out some of that equity without selling or employing a reverse mortgage to help fund retirement?” Frank wonders.

What the expert says

Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, said to maintain their current lifestyle after they retire, Frank and Heather will need $113,000 per year before tax, or about $2.25 million. They are projected to have about $1.83 million, so they are 18 per cent behind their goal.

“This is not enough that they would necessarily have to work longer, but it is better to be 10 to 20 per cent ahead of your goal to allow for some things to go wrong,” he said.

To get on track and assuming a seven per cent return on their largely equity-based portfolio, Rempel said they could maintain their current allocation of between 80 per cent and 90 per cent in equities for life and invest at least $2,250 per month for the next three years.

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“At least one of them is likely to be alive 35 to 40 years from now,” he said. “Maintaining a relatively high equity allocation will help them retire with their current lifestyle.

Rempel said it’s also important to note that reinvesting dividends does not add to their investments, since the dividends are money coming out of their investments that they reinvest, not an additional investment.

To make income splitting in retirement easier and to save tax, he recommends their RRSP contributions should all go in Heather’s name: either in her RRSP or in a spousal RRSP in her name with Frank as the contributor.

As for the “cash cushion” provided by the GICs, Rempel has his reservations.

“It sounds good and means they can draw on it if their other investments are down, but this has never actually worked,” he said. “The reduced return of the GICs versus the rest of their portfolio over a 30-year retirement has always been a more significant factor.”

Rempel said LIRAs and RESPs are allowed to hold the same investments as RRSPs and TFSAs, but notes the RESP will likely be used by their daughter in the next three years, so they may want to invest it more conservatively.

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Given Frank and Heather’s comfort with equities, which are likely to make a higher return in the long term than the pension administrator for Heather’s defined-contribution pension, Rempel suggests they look at the investments in her pension now and decide whether they would prefer their own investments.

He also recommends both Heather and Frank start their Canada Pension Plan (CPP) and Old Age Security (OAS) benefits at age 65.

“Deferring CPP from age 60 to 65 gives them an implied return of 10.4 per cent per year on investments they would have to withdraw to provide the same income. This is likely more than their investments would make in that period,” he said. “Their investments can provide their full lifestyle for the first five years of retirement. Then CPP and OAS can kick in and they can reduce their investment withdrawals to keep their income the same.”

Tapping into their home equity to fund retirement can take a few forms: sell, rent and invest the proceeds; borrow from a secured line of credit to spend; borrow from a secured line of credit to invest and provide income; or keep the home to either pay for a nursing home or become part of their estate.

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“All four options have major pros and cons,” Rempel said. “This is a complex topic and they should probably consult a financial planner experienced with this issue.”

In terms of structuring withdrawals in retirement, he recommends they try to keep their taxable incomes below $56,000 a year plus inflation (which will keep them in the lowest tax brackets in their province).

“To do this, they should withdraw a bit less than their maximum from their LIRAs first since it is the least flexible, and then from their RRIFs (registered retirement income funds) — converted from RRSPs — to provide the $56,000 for each of them, including government pensions,” he said. “Then withdraw the rest from their TFSAs to keep their taxable income from being higher. Effective tax planning on their withdrawals should be done each year.”

* Names have been changed to protect privacy.

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